Notes to Consolidated Financial Statements
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1.
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SUMMARY OF 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 consolidated financial statements refer to Verint Systems Inc. and its consolidated subsidiaries.
Verint is a global leader in Actionable Intelligence solutions. In a world of massive information growth, our solutions empower organizations with crucial, actionable insights and enable decision makers to anticipate, respond, and take action. Today, over 10,000 organizations in more than 180 countries, including over 85 percent of the Fortune 100, use Verint’s Actionable Intelligence solutions, deployed in the cloud and on premises, to make more informed, timely, and effective decisions.
Our Actionable Intelligence leadership is powered by innovative, enterprise-class software built with artificial intelligence, analytics, automation, and deep domain expertise established by working closely with some of the most sophisticated and forward-thinking organizations in the world. We believe we have one of the industry’s strongest research and development (“R&D”) teams focused on actionable intelligence consisting of approximately one-third of our approximately 6,500 professionals. Our innovative solutions are backed-up by a strong IP portfolio with over 1,000 patents and patent applications worldwide across areas including data capture, artificial intelligence, machine learning, unstructured data analytics, predictive analytics and automation.
On December 4, 2019, we announced our intention to separate into two independent publicly traded companies: one which will consist of our Customer Engagement Solutions business, and one which will consist of our Cyber Intelligence Solutions business. We expect to implement the separation through a pro-rata distribution of common stock of a new entity that will hold the Cyber Intelligence Solutions business to our stockholders (the “Spin-Off”) that is intended to be tax-free to our stockholders for U.S. federal income tax purposes. We expect to complete the Spin-Off shortly after the end of our fiscal year ending January 31, 2021. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Recent Developments” under Item 7 of this report for a more detailed discussion of the planned Spin-Off.
On December 4, 2019, we also announced that Valor Parent LP (the “Apax Investor”), an affiliate of Apax Partners (“Apax”) will make an investment in us in an amount of up to $400 million, subject to customary closing conditions including the receipt of required regulatory and government approvals. Under the terms of the agreement, the Apax Investor will initially purchase $200 million of our Series A convertible preferred stock, which is expected to occur during the first quarter of our fiscal year ending January 31, 2021. Shortly following the Spin-Off, the Apax Investor will purchase, subject to certain conditions, up to $200 million of Series B convertible preferred stock in the Company, as the entity holding the Customer Engagement Solutions business. Following the closing of the Series A investment, Apax’s ownership in us on an as-converted basis will be approximately 5%. Following completion of the Spin-Off and assuming the issuance of the Series B preferred stock, Apax’s ownership in us on an as-converted basis will be between 11.5% and 15%. See “Management’s discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Overview” under Item 7 of this report for a more detailed discussion of the planned Apax investment.
Headquartered in Melville, New York, we support our customers around the globe directly and with an extensive network of selling and support partners.
Impact of COVID-19 Pandemic
During the fourth quarter ended January 31, 2020, concerns related to the spread of COVID-19 began to create global business disruptions as well as disruptions in our operations and to create potential negative impacts on our revenues and other financial results. COVID-19 was declared a pandemic by the World Health Organization on March 11, 2020. The extent to which COVID-19 will impact our financial condition or results of operations is currently uncertain and depends on factors including the impact on our customers, partners, and vendors and on the operation of the global markets in general. Because an increasing portion of our business is based on a subscription model, the effect of COVID-19 on our results of operations may also not be fully reflected for some time. As of the date of the consolidated financial statements presented in this report (January 31, 2020), the impact of the COVID-19 pandemic was not significant. No asset impairments were recorded as of the balance sheet date as no triggering events or changes in circumstances had occurred as of year-end to require such an
impairment; however, due to significant uncertainty surrounding the situation, management’s judgment regarding this could change in the future.
See Note 19, “Subsequent Events”, for additional information regarding the impact of the COVID-19 pandemic.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Verint Systems Inc., our wholly owned or otherwise controlled subsidiaries, and a joint venture in which we hold a 50% equity interest. The joint venture is a variable interest entity in which we are the primary beneficiary. Noncontrolling interests in less than wholly owned subsidiaries are reflected within stockholders’ equity on our consolidated balance sheet, but separately from our stockholders’ equity. We hold an option to acquire the noncontrolling interests in two majority owned subsidiaries and we account for the option as an in-substance investment in the noncontrolling common stock of each such subsidiary. We include the fair value of the option within other liabilities and do not recognize noncontrolling interests in these subsidiaries.
Equity investments in companies in which we have less than a 20% ownership interest and cannot exercise significant influence, and which do not have readily determinable fair values, are accounted for at cost, adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer, less any impairment.
We include the results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Restricted Cash and Cash Equivalents, and Restricted Bank Time Deposits
Restricted cash and cash equivalents, and restricted bank time deposits are pledged as collateral or otherwise restricted as to use for vendor payables, general liability insurance, workers’ compensation insurance, warranty programs, and other obligations.
Investments
Our investments generally consist of bank time deposits, and marketable debt securities of corporations, the U.S. government, and agencies of the U.S. government, all with remaining maturities in excess of 90 days at the time of purchase. We held no marketable debt securities at January 31, 2020 and 2019. Investments with maturities in excess of one year are included in other assets.
Accounts Receivable, Net
Trade accounts receivable are comprised of invoiced amounts due from customers for which we have an unconditional right to collect and are not interest-bearing. Credit is extended to customers based on an evaluation of their financial condition and other factors. We generally do not require collateral or other security to support accounts receivable.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, bank time deposits, short-term investments, trade accounts receivable, and contract assets. We invest our cash in bank accounts, certificates of deposit, and money market accounts with major financial institutions, in U.S. government and agency obligations, and in debt securities of corporations. By policy, we seek to limit credit exposure on investments through diversification and by restricting our investments to highly rated securities.
We grant credit terms to our customers in the ordinary course of business. Concentrations of credit risk with respect to trade accounts receivable and contract assets are generally limited due to the large number of customers comprising our customer base and their dispersion across different industries and geographic areas. There are two customers in our Cyber Intelligence segment that combined accounted for $51.7 million and $84.3 million of our aggregated accounts receivable and contract
assets, at January 31, 2020 and 2019, respectively. These amounts result from both direct and indirect contracts with governmental agencies outside of the U.S., which we believe present insignificant credit risk.
Allowance for Doubtful Accounts
We estimate the collectability of our accounts receivable balances each accounting period and adjust our allowance for doubtful accounts accordingly. Considerable judgment is required in assessing the collectability of accounts receivable, including consideration of the creditworthiness of each customer, their collection history, and the related aging of past due accounts receivable balances. We evaluate specific accounts when we learn that a customer may be experiencing a deteriorating financial condition due to lower credit ratings, bankruptcy, or other factors that may affect its ability to render payment. We write-off an account receivable and charge it against its recorded allowance at the point when it is considered uncollectible.
The following table summarizes the activity in our allowance for doubtful accounts for the years ended January 31, 2020, 2019, and 2018:
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Year Ended January 31,
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(in thousands)
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2020
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2019
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2018
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Allowance for doubtful accounts, beginning of year
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$
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3,777
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$
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2,217
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$
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1,842
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Provisions charged to expense
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2,572
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2,746
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559
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Amounts written off
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(1,176
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)
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(1,172
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)
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(482
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)
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Other, including fluctuations in foreign exchange rates
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151
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(14
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)
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298
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Allowance for doubtful accounts, end of year
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$
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5,324
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$
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3,777
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$
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2,217
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Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the weighted-average method of inventory accounting. The valuation of our inventories requires us to make estimates regarding excess or obsolete inventories, including making estimates of the future demand for our products. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand, price, or technological developments could have a significant impact on the value of our inventory and reported operating results. Charges for excess and obsolete inventories are included within cost of revenue.
Property and Equipment, net
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method based over the estimated useful lives of the assets. The vast majority of equipment, furniture and other is depreciated over periods ranging from three years to seven years. Software is typically depreciated over periods ranging from three years to four years. Buildings are depreciated over periods ranging from ten years to twenty-five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term. Finance leased assets are amortized over the related lease term.
The cost of maintenance and repairs of property and equipment is charged to operations as incurred. When assets are retired or disposed of, the cost and accumulated depreciation or amortization thereon are removed from the consolidated balance sheet and any resulting gain or loss is recognized in the consolidated statement of operations.
Segment Reporting
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.
We conduct our business through two operating segments, which are also our reportable segments—Customer Engagement Solutions (“Customer Engagement”) and Cyber Intelligence Solutions (“Cyber Intelligence”). Organizing our business through two operating segments allows us to align our resources and domain expertise to effectively address the Actionable Intelligence market. We determine our reportable segments based on a number of factors our management uses to evaluate and run our business operations, including similarities of customers, products, and technology. Our Chief Executive Officer is our CODM, who primarily reviews segment revenue and segment operating contribution when assessing the financial performance of our segments and allocating resources.
Segment revenue includes adjustments associated with revenue of acquired companies, which are not recognizable within GAAP revenue. These adjustments primarily relate to the acquisition-date excess of the historical carrying value over the fair value of acquired companies’ future maintenance and service performance obligations. As the obligations are satisfied, we report our segment revenue using the historical carrying values of these obligations, which we believe better reflects our ongoing maintenance and service revenue streams, whereas GAAP revenue is reported using the obligations’ acquisition-date fair values. Segment revenue adjustments can also result from aligning an acquired company’s historical revenue recognition policies to our policies.
Segment contribution includes segment revenue and expenses incurred directly by the segment, including material costs, service costs, research and development, selling, marketing, and certain administrative expenses. When determining segment contribution, we do not allocate certain operating expenses which are provided by shared resources or are otherwise generally not controlled by segment management. These expenses are reported as “Shared support expenses” when reconciling segment contribution to operating income, the majority of which are expenses for administrative support functions, such as information technology, human resources, finance, legal, and other general corporate support, and for occupancy expenses. These unallocated expenses also include procurement, manufacturing support, and logistics expenses. We share resources across our segments for efficiency and to avoid duplicative costs.
In addition, segment contribution does not include amortization of acquired intangible assets, stock-based compensation, and other expenses that either can vary significantly in amount and frequency, are based upon subjective assumptions, or in certain cases are unplanned for or difficult to forecast, such as restructuring expenses and business combination transaction and integration expenses, all of which are not considered when evaluating segment performance.
Revenue from transactions between our operating segments is not material.
Please refer to Note 17, “Segment, Geographic, and Significant Customer Information” for further details regarding our operating segments.
Goodwill and Other Acquired Intangible Assets
For business combinations, the purchase prices are allocated to the tangible assets and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the remaining unallocated purchase prices recorded as goodwill. Goodwill is assigned, at the acquisition date, to those reporting units expected to benefit from the synergies of the combination.
We test goodwill for impairment at the reporting unit level, which can be an operating segment or one level below an operating segment, on an annual basis as of November 1, or more frequently if changes in facts and circumstances indicate that impairment in the value of goodwill may exist. As of January 31, 2020, our reporting units are Customer Engagement, Cyber Intelligence (excluding situational intelligence solutions), and Situational Intelligence, which is a component of our Cyber Intelligence operating segment.
In testing for goodwill impairment, we may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we elect to bypass a qualitative assessment, or if our qualitative assessment indicates that goodwill impairment is more likely than not, we perform quantitative impairment testing. If our quantitative testing determines that the carrying value of a reporting unit exceeds its fair value, goodwill impairment is recognized in an amount equal to that excess, limited to the total goodwill allocated to that reporting unit.
We utilize some or all of three primary approaches to assess the fair value of a reporting unit: (a) an income-based approach, using projected discounted cash flows, (b) a market-based approach, using valuation multiples of comparable companies, and (c) a transaction-based approach, using valuation multiples for recent acquisitions of similar businesses made in the marketplace. Our estimate of fair value of each reporting unit is based on a number of subjective factors, including: (a) appropriate consideration of valuation approaches (income approach, comparable public company approach, and comparable transaction approach), (b) estimates of future growth rates, (c) estimates of our future cost structure, (d) discount rates for our estimated cash flows, (e) selection of peer group companies for the public company and the market transaction approaches, (f) required levels of working capital, (g) assumed terminal value, and (h) time horizon of cash flow forecasts.
Acquired identifiable intangible assets include identifiable acquired technologies, customer relationships, trade names, distribution networks, non-competition agreements, sales backlog, and in-process research and development. We amortize the cost of finite-lived identifiable intangible assets over their estimated useful lives, which are periods of 10 years or less.
Amortization is based on the pattern in which the economic benefits of the intangible asset are expected to be realized, which typically is on a straight-line basis. The fair values assigned to identifiable intangible assets acquired in business combinations are determined primarily by using the income approach, which discounts expected future cash flows attributable to these assets to present value using estimates and assumptions determined by management. The acquired identifiable finite-lived intangible assets are being amortized primarily on a straight-line basis, which we believe approximates the pattern in which the assets are utilized, over their estimated useful lives.
Fair Value Measurements
Accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. This fair value hierarchy consists of three levels of inputs that may be used to measure fair value:
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Level 1: quoted prices in active markets for identical assets or liabilities;
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Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
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Level 3: unobservable inputs that are supported by little or no market activity.
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We review the fair value hierarchy classification of our applicable assets and liabilities at each reporting period. Changes in the observability of valuation inputs may result in transfers within the fair value measurement hierarchy. We did not identify any transfers between levels of the fair value measurement hierarchy during the years ended January 31, 2020 and 2019.
Fair Values of Financial Instruments
Our recorded amounts of cash and cash equivalents, restricted cash and cash equivalents, and restricted bank time deposits, accounts receivable, contract assets, investments, and accounts payable approximate fair value, due to the short-term nature of these instruments. We measure certain financial assets and liabilities at fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.
Derivative Financial Instruments
As part of our risk management strategy, when considered appropriate, we use derivative financial instruments including foreign currency forward contracts and interest rate swap agreements to hedge against certain foreign currency and interest rate exposures. Our intent is to mitigate gains and losses caused by the underlying exposures with offsetting gains and losses on the derivative contracts. By policy, we do not enter into speculative positions with derivative instruments.
We record all derivatives as assets or liabilities on our consolidated balance sheets at their fair values. Gains and losses from the changes in values of these derivatives are accounted for based on the use of the derivative and whether it qualifies for hedge accounting.
The counterparties to our derivative financial instruments consist of several major international financial institutions. We regularly monitor the financial strength of these institutions. While the counterparties to these contracts expose us to credit-related losses in the event of a counterparty’s non-performance, the risk would be limited to the unrealized gains on such affected contracts. We do not anticipate any such losses.
Revenue Recognition
We account for revenue in accordance with ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which was adopted on February 1, 2018, using the modified retrospective transition method. For further discussion of our accounting policies related to revenue see Note 2, “Revenue Recognition.”
Cost of Revenue
Our cost of revenue includes costs of materials, compensation and benefit costs for operations and service personnel, subcontractor costs, royalties and license fees related to third-party software included in our products, cloud infrastructure costs, depreciation of equipment used in operations and service, amortization of capitalized software development costs and certain purchased intangible assets, and related overhead costs. Costs that relate to satisfied (or partially satisfied) performance obligations in customer contracts (i.e. costs that relate to past performance) are expensed as incurred. Please refer to Note 2, “Revenue Recognition” under the heading “Costs to Obtain and Fulfill Contracts” for further details regarding customer contract costs.
Research and Development, net
With the exception of certain software development costs, all research and development costs are expensed as incurred, and consist primarily of personnel and consulting costs, travel, depreciation of research and development equipment, and related overhead and other costs associated with research and development activities.
We receive non-refundable grants from the Israeli Innovation Authority (“IIA”), formerly the Israel Office of the Chief Scientist (“OCS”), that fund a portion of our research and development expenditures. We currently only enter into non-royalty-bearing arrangements with the IIA which do not require us to pay royalties. Funds received from the IIA are recorded as a reduction to research and development expense. Royalties, to the extent paid, are recorded as part of our cost of revenue.
We also periodically derive benefits from participation in certain government-sponsored programs in other jurisdictions, for the support of research and development activities conducted in those locations.
Software Development Costs
Costs incurred to acquire or develop software to be sold, leased or otherwise marketed are capitalized after technological feasibility is established, and continue to be capitalized through the general release of the related software product. Amortization of capitalized costs begins in the period in which the related product is available for general release to customers and is recorded on a straight-line basis, which approximates the pattern in which the economic benefits of the capitalized costs are expected to be realized, over the estimated economic lives of the related software products, generally four years.
Internal-Use Software
We capitalize costs associated with software that is acquired, internally developed or modified solely to meet our internal needs. Capitalization begins when the preliminary project stage has been completed and management with the relevant authority authorizes and commits to the funding of the project. These capitalized costs include external direct costs utilized in developing or obtaining the applications and expenses for employees who are directly associated with the development of the applications. Capitalization of such costs continues until the project is substantially complete and is ready for its intended purpose. Capitalized costs of computer software developed for internal use are generally amortized over estimated useful lives of four years on a straight-line basis, which best represents the pattern of the software’s use.
Income Taxes
We account for income taxes under the asset and liability method which includes the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our consolidated financial statements. Under this approach, deferred taxes are recorded for the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus deferred taxes. Deferred taxes result from differences between the financial statement and tax bases of our assets and liabilities, and are adjusted for changes in tax rates and tax laws when changes are enacted. The effects of future changes in income tax laws or rates are not anticipated.
We are subject to income taxes in the United States and numerous foreign jurisdictions. The calculation of our income tax provision involves the application of complex tax laws and requires significant judgment and estimates. On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted in the United States. The 2017 Tax Act significantly revised the Internal Revenue Code and it included fundamental changes to taxation of U.S. multinational corporations. Compliance with the 2017 Tax Act requires significant complex computations not previously required by U.S. tax law.
We evaluate the realizability of our deferred tax assets for each jurisdiction in which we operate at each reporting date, and establish valuation allowances when it is more likely than not that all or a portion of our deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income of the same character and in the same jurisdiction. We consider all available positive and negative evidence in making this assessment, including, but not limited to, the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. In circumstances where there is sufficient negative evidence indicating that our deferred tax assets are not more-likely-than-not realizable, we establish a valuation allowance.
We use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate tax positions taken or expected to be taken in a tax return by assessing whether they are more-likely-than-not sustainable, based solely on their technical merits, upon examination and including resolution of any related appeals or litigation process. The second step is to measure the associated tax benefit of each position as the largest amount that we believe is more-likely-than-not realizable. Differences between the amount of tax benefits taken or expected to be taken in our income tax returns and the amount of tax benefits recognized in our financial statements represent our unrecognized income tax benefits, which we either record as a liability or as a reduction of deferred tax assets. Our policy is to include interest (expense and/or income) and penalties related to unrecognized income tax benefits as a component of the provision for income taxes.
Functional Currencies and Foreign Currency Transaction Gains and Losses
The functional currency for most of our foreign subsidiaries is the applicable local currency, although we have several subsidiaries with functional currencies that differ from their local currency, of which the most notable exceptions are our subsidiaries in Israel, whose functional currencies are the U.S. dollar.
Transactions denominated in currencies other than a functional currency are converted to the functional currency on the transaction date, and any resulting assets or liabilities are further translated at each reporting date and at settlement. Gains and losses recognized upon such translations are included within other income (expense), net in the consolidated statements of operations. We recorded net foreign currency losses of $0.1 million and $5.5 million for the years ended January 31, 2020 and 2019, respectively, and net foreign currency gains of $6.8 million for the year ended January 31, 2018.
For consolidated reporting purposes, in those instances where a foreign subsidiary has a functional currency other than the U.S. dollar, revenue and expenses are translated into U.S. dollars using average exchange rates for the reporting period, while assets and liabilities are translated into U.S. dollars using period-end rates. The effects of foreign currency translation adjustments are included in stockholders’ equity as a component of accumulated other comprehensive loss in the accompanying consolidated balance sheets.
Stock-Based Compensation
We recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of the award. We recognize the fair value of the award as compensation expense over the period during which an employee is required to provide service in exchange for the award.
For performance stock units for which vesting is in part dependent on total shareholder return, the fair value of the award is estimated on the date of grant using a Monte Carlo Simulation. Expected volatility and expected term are input factors for that model and may require significant management judgment. Expected volatility is estimated utilizing daily historical volatility for Verint common stock price and the constituents of the specific comparator index over a period commensurate with the remaining award performance period. The risk-free interest rate used is equal to the implied daily yield of the zero-coupon U.S. Treasury bill that corresponds with the remaining performance period of the award as of the valuation date.
Net Income (Loss) Per Common Share Attributable to Verint Systems Inc.
Shares used in the calculation of basic net income (loss) per common share are based on the weighted-average number of common shares outstanding during the accounting period. Shares used in the calculation of basic net income per common share include vested but unissued shares underlying awards of restricted stock units when all necessary conditions for earning those shares have been satisfied at the award’s vesting date, but exclude unvested shares of restricted stock because they are contingent upon future service conditions.
We have the option to pay cash, issue shares of common stock, or any combination thereof for the aggregate amount due upon conversion of our 1.50% convertible senior notes due June 1, 2021 (the “Notes”), further details for which appear in Note 7, “Long-Term Debt”. We currently intend to settle the principal amount of the Notes in cash upon conversion and as a result, only the amounts payable in excess of the principal amounts of the Notes, if any, are assumed to be settled with shares of common stock for purposes of computing diluted net income per share.
In periods for which we report a net loss, basic net loss per common share and diluted net loss per common share are identical since the effect of potential common shares is anti-dilutive and therefore excluded.
Leases
We determine if an arrangement is a lease at inception. Operating lease assets are presented as operating lease right-of-use (“ROU”) assets, and corresponding operating lease liabilities are presented within accrued expenses and other current liabilities (current portions), and as operating lease liabilities (long-term portions), on our consolidated balance sheets. Finance lease assets are included in property and equipment, and corresponding finance lease liabilities are included within accrued expenses and other current liabilities (current portions), and other liabilities (long-term portions), on our consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the remaining lease payments over the lease term at commencement date. Our leases do not provide an implicit interest rate. We calculate the incremental borrowing rate to reflect the interest rate that we would have to pay to borrow on a collateralized basis an amount equal to the lease payments in a similar economic environment over a similar term, and consider our historical borrowing activities and market data in this determination. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which we account for as a single lease component. Some of our leases contain variable lease payments, which are expensed as incurred unless those payments are based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease commencement and included in the measurement of the lease liability; thereafter, changes to lease payments due to rate or index updates are recorded as rent expense in the period incurred. We have elected not to recognize ROU assets and lease liabilities for short-term leases that have a term of twelve months or less. The effect of short-term leases on our ROU assets and lease liabilities was not material. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. In addition, we do not have any related party leases and our sublease transactions are de minimis.
Recent Accounting Pronouncements
New Accounting Pronouncements Recently Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 supersedes the requirements in Topic 840, Leases, and requires lessees to recognize ROU assets and liabilities for leases with lease terms of more than twelve months. We adopted ASU No. 2016-02 as of February 1, 2019 using the modified retrospective transition method of applying the new standard at the adoption date. Results for reporting periods beginning on or after February 1, 2019 are presented under the new guidance, while prior periods amounts are not adjusted and continue to be reported in accordance with previous guidance. Disclosures required under the new standard will not be provided for dates and periods before February 1, 2019.
The new standard provided a number of optional practical expedients in transition. We elected the transition package of practical expedients available in the standard, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs and the practical expedient to not account for lease and non-lease components separately. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us.
The adoption of ASU No. 2016-02 resulted in the recognition of ROU assets of approximately $100.4 million and lease liabilities for operating leases of approximately $110.4 million on our consolidated balance sheet as of February 1, 2019 with no material impact to our consolidated statements of operations. The ROU assets are lower than the operating lease liabilities primarily because previously recorded net deferred rent balances were reclassified into the ROU assets. There was no impact to our accumulated deficit upon adoption of the standard. The adoption of the new standard also resulted in significant additional disclosures regarding our leasing activities. Please refer to Note 15, “Leases” for further details.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides companies the option to reclassify from accumulated other comprehensive income to retained earnings the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). The stranded tax effect represents the difference between the amount
previously recorded in other comprehensive income at the historical U.S. federal tax rate that remains in accumulated other comprehensive loss at the time the 2017 Tax Act was effective and the amount that would have been recorded using the newly enacted rate. We adopted this guidance on February 1, 2019, and the adoption did not have an impact on our consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting, to simplify the accounting for nonemployee share-based payment transactions by expanding the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Under the new standard, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. Adoption of this standard had an immaterial impact on our consolidated financial statements.
New Accounting Pronouncements Not Yet Effective
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which affects general principles within Topic 740, Income Taxes and is meant to simplify and reduce the cost of accounting for income taxes. This standard is effective for interim and annual reporting periods beginning after December 15, 2020. We are currently reviewing this standard but do not expect that it will have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires customers in a hosting arrangement that is a service contract to follow existing internal-use software guidance to determine which implementation costs to capitalize and which costs to expense. This standard is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We adopted this guidance prospectively to eligible costs incurred on or after February 1, 2020 and do not expect the implementation to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to The Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. This standard is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual reporting periods, with early adoption permitted. Since the standard affects only disclosure requirements, we do not expect the adoption of the standard to have an impact on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. 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. A modified retrospective adoption method is required, with a cumulative-effect adjustment to the opening retained earnings balance in the period of adoption. We are currently completing our evaluations of the impact of adopting this standard but do not expect its adoption to have a significant impact on our consolidated financial statements.
On February 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method applied to those contracts that were not completed as of February 1, 2018. Results for reporting periods beginning after February 1, 2018 are presented under ASU No. 2014-09, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under prior guidance. For contracts that were modified before the effective date of ASU No. 2014-09, we recorded the aggregate effect of all modifications when identifying performance obligations and allocating the transaction price in accordance with the practical expedient provided for under the accounting standard, which permits an entity to record the aggregate effect of all contract modifications that occur before the beginning of the earliest period presented in accordance with the new standard when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations.
Under ASU No. 2014-09, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for contracts that are within the scope of new standard, we perform the following five steps:
1) Identify the contract(s) with a customer
A contract with a customer exists when (i) we enter into an enforceable contract with the customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance, and (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or in the case of a new customer, published credit and financial information pertaining to the customer. Our customary business practice is to enter into legally enforceable written contracts with our customers. The majority of our contracts are governed by a master agreement between us and the customer, which sets forth the general terms and conditions of any individual contract between the parties, which is then supplemented by a customer purchase order to specify the different goods and services, the associated prices, and any additional terms for an individual contract. Multiple contracts with a single counterparty entered into at the same time are evaluated to determine if the contracts should be combined and accounted for as a single contract.
2) Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or services either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, we must apply judgment to determine whether promised goods or services are capable of being distinct and are distinct in the context of the contract. If these criteria are not met the promised goods or services are accounted for as a combined performance obligation. Generally, our contracts do not include non-distinct performance obligations, but certain Cyber Intelligence customers require design, development, or significant customization of our products to meet their specific requirements, in which case the products and services are combined into one distinct performance obligation.
3) Determine the transaction price
The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer. We assess the timing of transfer of goods and services to the customer as compared to the timing of payments to determine whether a significant financing component exists. As a practical expedient, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less, which is the case in the majority of our customer contracts. The primary purpose of our invoicing terms is not to receive or provide financing from or to customers. Our Cyber Intelligence contracts may require an advance payment to encourage customer commitment to the project and protect us from early termination of the contract. To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price, if we assessed that a significant future reversal of cumulative revenue under the contract will not occur. Typically, our contracts do not provide our customers with any right of return or refund, and we do not constrain the contract price as it is probable that there will not be a significant revenue reversal due to a return or refund.
4) Allocate the transaction price to the performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct goods or services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, we must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. We allocate the variable amount to one or more distinct performance obligations but not all or to one or more distinct services that forms a part of a single performance obligation, when the payment terms of the variable amount relate solely to our efforts to satisfy that distinct performance obligation and it results in an allocation that is consistent with the overall allocation objective of ASU No. 2014-09. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct
good or service that forms part of a single performance obligation. We determine standalone selling price (“SSP”) based on the price at which the performance obligation is sold separately. If the SSP is not observable through past transactions, we estimate the SSP taking into account available information such as market conditions, including geographic or regional specific factors, competitive positioning, internal costs, profit objectives, and internally approved pricing guidelines related to the performance obligation.
5) Recognize revenue when (or as) the entity satisfies a performance obligation
We satisfy performance obligations either over time or at a point in time depending on the nature of the underlying promise. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer. In the case of contracts that include customer acceptance criteria, revenue is not recognized until we can objectively conclude that the product or service meets the agreed-upon specifications in the contract.
We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to our customers. Revenue is measured based on consideration specified in a contract with a customer, and excludes taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer.
Shipping and handling activities that are billed to the customer and occur after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of revenue. Historically, these expenses have not been material.
Nature of Goods and Services
We derive and report our revenue in two categories: (a) product revenue, including licensing of software products, and the sale of hardware products, and (b) service and support revenue, including revenue from installation services, initial and renewal support, project management, hosting services, cloud deployments, bundled SaaS, optional managed services, product warranties, business advisory consulting, and training services.
Our software licenses either provide our customers a perpetual right to use our software or the right to use our software for only a fixed term, in most cases between a one- and three-year time frame. Generally, our contracts do not provide significant services of integration and customization and installation services are not required to be purchased directly from us. The software is delivered before related services are provided and is functional without professional services, updates and technical support. We have concluded that the software license is distinct as the customer can benefit from the software on its own. Software revenue is typically recognized when the software is delivered or made available for download to the customer. We rarely sell our software licenses on a standalone basis and as a result SSP is not directly observable and must be estimated. We apply the adjusted market assessment approach, considering both market conditions and entity specific factors such as assessment of historical data of bundled sales of software licenses with other promised goods and services in order to maximize the use of observable inputs. Software SSP is established based on an appropriate discount from our established list price, taking into consideration whether there are certain stratifications of the population with different pricing practices. Revenue for hardware is recognized at a point in time, generally upon shipment or delivery.
In our Cyber Intelligence Solutions segment certain contracts require us to significantly customize our software and these contracts are generally recognized over time as we perform because our performance does not create an asset with an alternative use and we have an enforceable right to payment plus a reasonable profit for performance completed to date. Revenue is recognized over time based on the extent of progress towards completion of the performance obligation. We use labor hours incurred to measure progress for these contracts because it best depicts the transfer of the asset to the customer. Under the labor hours incurred measure of progress, the extent of progress towards completion is measured based on the ratio of labor hours incurred to date to the total estimated labor hours at completion of the distinct performance obligation. Due to the nature of the work performed in these arrangements, the estimation of total labor hours at completion is complex, subject to many variables and requires significant judgment. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in revenue on a cumulative catch-up basis in the period in which the circumstances that gave rise to the revision become known. We use the expected cost plus a margin approach to estimate the SSP of our significantly customized solutions.
Professional services revenues primarily consist of fees for deployment and optimization services, as well as training, and are generally recognized over time as the customer simultaneously receives and consumes the benefits of the professional services as the services are performed. Professional services that are billed on a time and materials basis are recognized over time as the
services are performed. For contracts billed on a fixed price basis, revenue is recognized over time using an input method based on labor hours expended to date relative to the total labor hours expected to be required to satisfy the related performance obligation. We determine SSP for our professional services based on the price at which the performance obligation is sold separately, which is observable through past transactions.
Our bundled SaaS contracts are typically comprised of a right to access our software, maintenance, hosting fees and standard managed services. We do not provide the customer the contractual right to take possession of the software at any time during the hosting period under these contracts. The customer can only benefit from the SaaS license, maintenance and standard managed services when combined with the hosting service as the hosting service is the only way for the customer to access the software and benefit from the maintenance and managed services. Accordingly, each of the license, maintenance, hosting and standard managed services is not considered a distinct performance obligation in the context of the contract, and are combined into a single performance obligation (“bundled SaaS services”) and recognized ratably over the contract period. Our bundled SaaS customer contracts can consist of fixed, variable, and usage based fees. Typically, we invoice a portion of the fees at the outset of the contract and then monthly or quarterly thereafter. Certain bundled SaaS contracts include a nonrefundable upfront fee for setup services, which are not distinct from the bundled SaaS services. Non-distinct setup services represent an advanced payment for future bundled SaaS services, and are recognized as revenue when those bundled SaaS services are satisfied, unless the nonrefundable fee is considered to be a material right, in which case the nonrefundable fee is recognized over the expected benefit period, which includes anticipated renewals. We determine SSP for our bundled SaaS services based on the price at which the performance obligation is sold separately, which is observable through past renewal transactions. We satisfy our bundled SaaS services by providing access to our software over time and processing transactions for usage based contracts. For non-usage based fees, the period of time over which we perform is commensurate with the contract term because that is the period during which we have an obligation to provide the service. The performance obligation is recognized on a time elapsed basis, by month for which the services are provided.
Customer support revenue is derived from providing telephone technical support services, bug fixes and unspecified software updates and upgrades to customers on a when-and-if-available basis. Each of these performance obligations provide benefit to the customer on a standalone basis and are distinct in the context of the contract. Each of these distinct performance obligations represent a stand ready obligation to provide service to a customer, which is concurrently delivered and has the same pattern of transfer to the customer, which is why we account for these support services as a single performance obligation. We recognize support services ratably over the contractual term, which typically is one year, and develop SSP for support services based on standalone renewal contracts.
Our Customer Engagement solutions are generally sold with a warranty of one year for hardware and 90 days for software. Our Cyber Intelligence solutions are generally sold with warranties that typically range from 90 days to three years and, in some cases, longer. These warranties do not represent an additional performance obligation as services beyond assuring that the software license and hardware complies with agreed-upon specifications are not provided.
Disaggregation of Revenue
The following table provides information about disaggregated revenue for our Customer Engagement and Cyber Intelligence segments by product revenue and service and support revenue, as well as by the recurring or nonrecurring nature of revenue for each business segment. Recurring revenue is the portion of our revenue that we believe is likely to be renewed in the future. The recurrence of these revenue streams in future periods depends on a number of factors including contractual periods and customers' renewal decisions.
For our Customer Engagement segment:
|
|
•
|
Recurring revenue primarily consists of cloud revenue and initial and renewal support revenue.
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|
|
◦
|
Cloud revenue consists primarily of SaaS revenue with some optional managed services revenue.
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|
|
◦
|
SaaS revenue consists predominately of bundled SaaS (software with standard managed services) with some unbundled SaaS (software licensing rights sold separately from managed services and accounted for as term-based licenses). Unbundled SaaS can be deployed in the cloud either by us or a cloud partner.
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|
|
◦
|
Bundled SaaS revenue is recognized over time and unbundled SaaS revenue is recognized at a point in time. Unbundled SaaS contracts are eligible for renewal after the initial fixed term, which in most cases is between a one- and three-year time frame.
|
|
|
•
|
Nonrecurring revenue primarily consists of our perpetual licenses, consulting, implementation and installation services, and training.
|
For our Cyber Intelligence segment:
|
|
•
|
Recurring revenue primarily consists of initial and renewal support, subscription software licenses, and SaaS in certain limited transactions.
|
|
|
•
|
Nonrecurring revenue primarily consists of our perpetual licenses, long-term projects including software customizations that are recognized over time as control transfers to the customer using a percentage-of-completion (“POC”) method, consulting, implementation and installation services, training, and hardware.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
January 31, 2020
|
|
Year Ended
January 31, 2019
|
(in thousands)
|
|
Customer Engagement
|
|
Cyber Intelligence
|
|
Total
|
|
Customer Engagement
|
|
Cyber Intelligence
|
|
Total
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
223,397
|
|
|
$
|
231,478
|
|
|
$
|
454,875
|
|
|
$
|
221,721
|
|
|
$
|
232,929
|
|
|
$
|
454,650
|
|
Service and support
|
|
623,128
|
|
|
225,631
|
|
|
848,759
|
|
|
574,566
|
|
|
200,531
|
|
|
775,097
|
|
Total revenue
|
|
$
|
846,525
|
|
|
$
|
457,109
|
|
|
$
|
1,303,634
|
|
|
$
|
796,287
|
|
|
$
|
433,460
|
|
|
$
|
1,229,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by recurrence:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring revenue
|
|
$
|
534,378
|
|
|
$
|
192,578
|
|
|
$
|
726,956
|
|
|
$
|
465,671
|
|
|
$
|
165,265
|
|
|
$
|
630,936
|
|
Nonrecurring revenue
|
|
312,147
|
|
|
264,531
|
|
|
576,678
|
|
|
330,616
|
|
|
268,195
|
|
|
598,811
|
|
Total revenue
|
|
$
|
846,525
|
|
|
$
|
457,109
|
|
|
$
|
1,303,634
|
|
|
$
|
796,287
|
|
|
$
|
433,460
|
|
|
$
|
1,229,747
|
|
The following table provides a further disaggregation of revenue for our Customer Engagement segment:
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|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Customer Engagement revenue
|
|
|
|
|
Recurring revenue
|
|
|
|
|
Bundled SaaS revenue
|
|
$
|
115,925
|
|
|
$
|
84,715
|
|
Unbundled SaaS revenue
|
|
43,368
|
|
|
24,925
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|
Optional managed services revenue
|
|
56,534
|
|
|
41,103
|
|
Total cloud revenue
|
|
215,827
|
|
|
150,743
|
|
Support revenue
|
|
318,551
|
|
|
314,928
|
|
Total recurring revenue
|
|
534,378
|
|
|
465,671
|
|
Nonrecurring revenue
|
|
|
|
|
|
|
Perpetual revenue
|
|
179,882
|
|
|
196,125
|
|
Professional services revenue
|
|
132,265
|
|
|
134,491
|
|
Total nonrecurring revenue
|
|
312,147
|
|
|
330,616
|
|
Total Customer Engagement revenue
|
|
$
|
846,525
|
|
|
$
|
796,287
|
|
Contract Balances
The following table provides information about accounts receivable, contract assets, and contract liabilities from contracts with customers:
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|
|
|
|
|
|
|
|
|
|
January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Accounts receivable, net
|
|
$
|
382,435
|
|
|
$
|
375,663
|
|
Contract assets
|
|
$
|
64,961
|
|
|
$
|
63,389
|
|
Long-term contract assets (included in Other assets)
|
|
$
|
1,358
|
|
|
$
|
1,375
|
|
Contract liabilities
|
|
$
|
397,350
|
|
|
$
|
377,376
|
|
Long-term contract liabilities
|
|
$
|
40,565
|
|
|
$
|
30,094
|
|
We receive payments from customers based upon contractual billing schedules, and accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets are rights to consideration in exchange for goods or services that we have transferred to a customer when that right is conditional on something other than the passage of time. The majority of
our contract assets represent unbilled amounts related to multi-year unbundled SaaS contracts and our significantly customized solutions as the right to consideration is subject to the contractually agreed upon billing schedule. We expect billing and collection of a majority of our contract assets to occur within the next twelve months and had no asset impairment related to contract assets in the years ended January 31, 2020 and 2019. There are two customers in our Cyber Intelligence segment that accounted for a combined $51.7 million and $84.3 million of our aggregated accounts receivable and contract assets at January 31, 2020 and January 31, 2019, respectively. These amounts result from both direct and indirect contracts with governmental agencies outside of the U.S. which we believe present insignificant credit risk. During the years ended January 31, 2020 and January 31, 2019, we transferred $49.1 million and $60.3 million, respectively, to accounts receivable from contract assets recognized at the beginning of each period, as a result of the right to the transaction consideration becoming unconditional. We recognized $48.8 million and $63.8 million of contract assets during the years ended January 31, 2020 and January 31, 2019, respectively. Contract assets recognized during the period primarily related to multi-year unbundled SaaS contracts in our Customer Engagement segment that are invoiced annually with license revenue recognized upfront.
Contract liabilities represent consideration received or consideration which is unconditionally due from customers prior to transferring goods or services to the customer under the terms of the contract. Revenue recognized during the years ended January 31, 2020 and January 31, 2019 from amounts included in contract liabilities at the beginning of each period was $331.6 million and $303.0 million, respectively.
Remaining Performance Obligations
Transaction price allocated to remaining performance obligations (“RPO”) represents contracted revenue that has not yet been recognized, which includes contract liabilities and non-cancelable amounts that will be invoiced and recognized as revenue in future periods. The majority of our arrangements are for periods of up to three years, with a significant portion being one year or less.
We elected to exclude amounts of variable consideration attributable to sales- or usage-based royalties in exchange for a license of our IP from the remaining performance obligations. The timing and amount of revenue recognition for our remaining performance obligations is influenced by several factors, including seasonality, the timing of support renewals, and the revenue recognition for certain projects, particularly in our Cyber Intelligence segment, that can extend over longer periods of time, delivery under which, for various reasons, may be delayed, modified, or canceled. Further, we have historically generated a large portion of our business each quarter by orders that are sold and fulfilled within the same reporting period. Therefore, the amount of remaining obligations may not be a meaningful indicator of future results.
The following table provides information about remaining performance obligations for each of our operating segments:
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|
|
|
|
|
|
|
|
|
|
January 31, 2020
|
|
January 31, 2019
|
(in thousands)
|
|
Customer Engagement
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|
Cyber Intelligence
|
|
Total
|
|
Customer Engagement
|
|
Cyber Intelligence
|
|
Total
|
RPO:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to be recognized within 1 year
|
|
$
|
374,982
|
|
|
$
|
356,677
|
|
|
$
|
731,659
|
|
|
$
|
358,916
|
|
|
$
|
302,703
|
|
|
$
|
661,619
|
|
Expected to be recognized in more than 1 year
|
|
117,497
|
|
|
225,056
|
|
|
342,553
|
|
|
91,472
|
|
|
267,436
|
|
|
358,908
|
|
Total RPO
|
|
$
|
492,479
|
|
|
$
|
581,733
|
|
|
$
|
1,074,212
|
|
|
$
|
450,388
|
|
|
$
|
570,139
|
|
|
$
|
1,020,527
|
|
Costs to Obtain and Fulfill Contracts
We capitalize commissions paid to internal sales personnel and agent commissions that are incremental to obtaining customer contracts. We have determined that these commissions are in fact incremental and would not have occurred absent the customer contract. Capitalized sales and agent commissions are amortized on a straight-line basis over the period the goods or services are transferred to the customer to which the assets relate, which ranges from immediate to as long as six years, if commission amounts paid upon renewal are not commensurate with amounts paid on the initial contract. A portion of the initial commission payable on the majority of Customer Engagement contracts is amortized over the anticipated support renewal period, which is generally four to six years, due to commissions paid on support renewal contracts not being commensurate with amounts paid on the initial contract.
Total capitalized costs to obtain contracts were $45.0 million as of January 31, 2020, of which $7.7 million is included in prepaid expenses and other current assets and $37.3 million is included in other assets on our consolidated balance sheet. Total capitalized costs to obtain contracts were $36.3 million as of January 31, 2019, of which $6.5 million is included in prepaid expenses and other current assets and $29.8 million is included in other assets on our consolidated balance sheet. During the years ended January 31, 2020 and January 31, 2019, we expensed $54.4 million and $45.7 million, respectively, of sales and agent commissions, which are included in selling, general and administrative expenses and there was no impairment loss recognized for these capitalized costs.
We capitalize costs incurred to fulfill our contracts when the costs relate directly to the contract and are expected to generate resources that will be used to satisfy the performance obligation under the contract and are expected to be recovered through revenue generated under the contract. Costs to fulfill contracts are expensed to cost of revenue as we satisfy the related performance obligations. Total capitalized costs to fulfill contracts were $14.7 million as of January 31, 2020, of which $8.4 million is included in deferred cost of revenue and $6.3 million is included in long-term deferred cost of revenue on our consolidated balance sheet. Total capitalized costs to fulfill contracts were $14.9 million as of January 31, 2019, of which $10.3 million is included in deferred cost of revenue and $4.6 million is included in long-term deferred cost of revenue on our consolidated balance sheet. Deferred cost of revenue is classified in its entirety as current or long-term based on whether the related revenue will be recognized within twelve months of the origination date of the arrangement. The amounts capitalized primarily relate to nonrecurring costs incurred in the initial phase of our bundled SaaS arrangements (i.e., setup costs), which consist of costs related to the installation of systems and processes and prepaid third-party cloud infrastructure costs. Capitalized setup costs are amortized on a straight-line basis over the expected period of benefit, which includes anticipated contract renewals or extensions, consistent with the transfer to the customer of the services to which the asset relates. During the years ended January 31, 2020 and January 31, 2019, we amortized $13.1 million and $18.3 million, respectively, of contract fulfillment costs.
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|
3.
|
NET INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC.
|
The following table summarizes the calculation of basic and diluted net income (loss) per common share attributable to Verint Systems Inc. for the years ended January 31, 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands, except per share amounts)
|
|
2020
|
|
2019
|
|
2018
|
Net income (loss)
|
|
$
|
35,683
|
|
|
$
|
70,220
|
|
|
$
|
(3,454
|
)
|
Net income attributable to noncontrolling interests
|
|
6,999
|
|
|
4,229
|
|
|
3,173
|
|
Net income (loss) attributable to Verint Systems Inc.
|
|
$
|
28,684
|
|
|
$
|
65,991
|
|
|
$
|
(6,627
|
)
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
66,129
|
|
|
64,913
|
|
|
63,312
|
|
Dilutive effect of employee equity award plans
|
|
1,226
|
|
|
1,332
|
|
|
—
|
|
Dilutive effect of 1.50% convertible senior notes
|
|
—
|
|
|
—
|
|
|
—
|
|
Dilutive effect of warrants
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted
|
|
67,355
|
|
|
66,245
|
|
|
63,312
|
|
Net income (loss) per common share attributable to Verint Systems Inc.:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.43
|
|
|
$
|
1.02
|
|
|
$
|
(0.10
|
)
|
Diluted
|
|
$
|
0.43
|
|
|
$
|
1.00
|
|
|
$
|
(0.10
|
)
|
We excluded the following weighted-average potential common shares from the calculations of diluted net income (loss) per common share during the applicable periods because their inclusion would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Stock options and restricted stock-based awards
|
|
900
|
|
|
276
|
|
|
1,187
|
|
1.50% convertible senior notes
|
|
6,205
|
|
|
6,205
|
|
|
6,205
|
|
Warrants
|
|
6,205
|
|
|
6,205
|
|
|
6,205
|
|
In periods for which we report a net loss attributable to Verint Systems Inc., basic net loss per common share and diluted net loss per common share are identical since the effect of all potential common shares is anti-dilutive and therefore excluded.
Our 1.50% convertible senior notes will not impact the calculation of diluted net income per share unless the average price of our common stock, as calculated in accordance with the terms of the indenture governing the Notes, exceeds the conversion price of $64.46 per share. Likewise, diluted net income per share will not include any effect from the Warrants (as defined in Note 7, “Long-Term Debt”) unless the average price of our common stock, as calculated under the terms of the Warrants, exceeds the exercise price of $75.00 per share.
Our Note Hedges (as defined in Note 7, “Long-Term Debt”) do not impact the calculation of diluted net income (loss) 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, however, be issued upon exercise of the Warrants. Further details regarding the Notes, Note Hedges, and the Warrants appear in Note 7, “Long-Term Debt”.
On December 4, 2019, we announced that Valor Parent LP, an affiliate of Apax Partners, will invest up to $400 million in us, in the form of convertible preferred stock. The calculation of basic and diluted net income (loss) per common share will be impacted upon closing of the investment, which is expected to occur during the first quarter of our fiscal year ending January 31, 2021. Further details regarding the separation of our businesses and the convertible preferred stock investment appear in Note 1, “Summary of Significant Accounting Policies” under “Description of Business”.
4. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The following tables summarize our cash, cash equivalents, and short-term investments as of January 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2020
|
(in thousands)
|
|
Cost Basis
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash and bank time deposits
|
|
$
|
379,057
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
379,057
|
|
Money market funds
|
|
89
|
|
|
—
|
|
|
—
|
|
|
89
|
|
Total cash and cash equivalents
|
|
$
|
379,146
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
379,146
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Bank time deposits
|
|
$
|
20,215
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,215
|
|
Total short-term investments
|
|
$
|
20,215
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2019
|
(in thousands)
|
|
Cost Basis
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash and bank time deposits
|
|
$
|
359,266
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
359,266
|
|
Money market funds
|
|
10,709
|
|
|
—
|
|
|
—
|
|
|
10,709
|
|
Total cash and cash equivalents
|
|
$
|
369,975
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
369,975
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Bank time deposits
|
|
$
|
32,329
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32,329
|
|
Total short-term investments
|
|
$
|
32,329
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32,329
|
|
Bank time deposits which are reported within short-term investments consist of deposits held outside of the U.S. with maturities of greater than 90 days, or without specified maturity dates which we intend to hold for periods in excess of 90 days. All other bank deposits are included within cash and cash equivalents.
During the years ended January 31, 2020, 2019, and 2018, proceeds from maturities and sales of available-for-sale securities were $59.3 million, $33.1 million, and $8.7 million, respectively.
|
|
5.
|
BUSINESS COMBINATIONS AND DIVESTITURES
|
Year Ended January 31, 2020
During the year ended January 31, 2020, we completed four business combinations:
|
|
•
|
On February 1, 2019, we completed the acquisition of a SaaS workforce optimization company focused on the small and medium-sized business (“SMB”) market as part of our strategy to expand our SMB portfolio. This company has been integrated into our Customer Engagement segment.
|
|
|
•
|
On July 25, 2019, we completed the acquisition of a SaaS company focused on cloud-based knowledge management solutions as part of our strategy to add additional artificial intelligence and machine learning capabilities into our portfolio. This company is being integrated into our Customer Engagement segment.
|
|
|
•
|
On December 18, 2019, we completed the acquisition of two software companies under common control focused on multi source intelligence and fusion analytics domains. These companies are being integrated into our Cyber Intelligence segment.
|
|
|
•
|
On January 13, 2020, we completed the acquisition of a SaaS based company providing web and mobile session replay solutions. This company is being integrated into our Customer Engagement segment.
|
These business combinations were not individually material to our consolidated financial statements.
The combined consideration for these business combinations of $89.3 million consisted of (i) $76.2 million of combined cash paid at closings or shortly thereafter, partially offset by $2.4 million of cash acquired, resulting in net cash consideration at closing of $73.8 million; and (ii) the fair value of the contingent consideration arrangements described below of $15.3 million; offset by (iii) $2.1 million of other purchase price adjustments. For three of the business combinations, we agreed to make potential additional cash payments to the respective former stockholders aggregating up to approximately $23.5 million, contingent upon the achievement of certain performance targets over periods extending through January 2022, the fair value of which was estimated to be $15.3 million at the acquisition date. Cash paid for these business combinations was funded by cash on hand.
The purchase prices for these business combinations were allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the remaining unallocated purchase prices recorded as goodwill. The fair value assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management.
Included among the factors contributing to the recognition of goodwill in these transactions were synergies in products and technologies, and the addition of skilled, assembled workforces. Of the $50.7 million of goodwill associated with these business combinations, $39.1 million and $11.6 million was assigned to our Customer Engagement and Cyber Intelligence segments, respectively, and $15.7 million of which is deductible for income tax purposes.
Revenue and net income (loss) attributable to these business combinations for the year ended January 31, 2020 were not material.
Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to these business combinations, totaled $5.7 million and $1.0 million for the year ended January 31, 2020 and 2019, respectively. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.
The purchase price allocations for the business combinations completed during the year ended January 31, 2020 have been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available during the respective measurement periods (up to one year from the respective acquisition dates). Fair values still under review include values assigned to identifiable intangible assets, goodwill, deferred income taxes, and reserves for uncertain income tax positions.
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, 2020:
|
|
|
|
|
|
(in thousands)
|
|
Amount
|
Components of Purchase Prices:
|
|
|
Cash
|
|
$
|
76,198
|
|
Fair value of contingent consideration
|
|
15,253
|
|
Other purchase price adjustments
|
|
(2,137
|
)
|
Total purchase prices
|
|
$
|
89,314
|
|
|
|
|
Allocation of Purchase Prices:
|
|
|
Net tangible assets (liabilities):
|
|
|
Accounts receivable
|
|
$
|
3,734
|
|
Other current assets, including cash acquired
|
|
14,086
|
|
Other assets
|
|
6,556
|
|
Current and other liabilities
|
|
(8,364
|
)
|
Contract liabilities - current and long-term
|
|
(3,794
|
)
|
Deferred income taxes
|
|
(4,061
|
)
|
Net tangible assets
|
|
8,157
|
|
Identifiable intangible assets:
|
|
|
Customer relationships
|
|
13,299
|
|
Developed technology
|
|
14,443
|
|
Trademarks and trade names
|
|
1,367
|
|
Non-compete agreements
|
|
1,307
|
|
Total identifiable intangible assets
|
|
30,416
|
|
Goodwill
|
|
50,741
|
|
Total purchase prices allocation
|
|
$
|
89,314
|
|
For these business combinations, customer relationships, developed technology, trademarks and trade names, and non-compete agreements were assigned estimated useful lives of from five years to nine years, four years to five years, three years to five years, and three years, respectively, the weighted average of which is approximately 6.1 years.
Year Ended January 31, 2019
ForeSee Results, Inc.
On December 19, 2018, we completed the acquisition of all of the outstanding shares of ForeSee Results, Inc. and all of the outstanding membership interests of RSR Acquisition LLC (together, “ForeSee”), a leading cloud Voice of the Customer (“VOC”) vendor with software solutions designed to measure and benchmark a 360-degree view of the customer across every touch point. ForeSee is based in Ann Arbor, Michigan.
The purchase price of $65.2 million consisted of (i) $58.9 million of cash paid at closing, funded from cash on hand, partially offset by $0.4 million of ForeSee’s cash received in the acquisition, resulting in net cash consideration at closing of $58.5 million; (ii) a post-closing deferred purchase price adjustment of $6.0 million which was paid in April 2019; and (iii) $0.3 million of other purchase price adjustments. The acquired business has been integrated into our Customer Engagement operating segment.
The purchase price for ForeSee was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. The fair value assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts the expected future cash flows to present value using estimates and assumptions determined by management.
Among the factors contributing to the recognition of goodwill as a component of the ForeSee purchase price allocation were synergies in products and technologies, and the addition of a skilled, assembled workforce. The $34.3 million of goodwill has been assigned to our Customer Engagement segment. For income tax purposes, $1.1 million of this goodwill is deductible and $33.2 million is not deductible.
In connection with the purchase price allocation for ForeSee, the estimated fair value of undelivered performance obligations under customer contracts assumed in the acquisition was determined utilizing a cost build-up approach. The cost build-up
approach calculated fair value by estimating the costs required to fulfill the obligations plus a reasonable profit margin, which approximates the amount that we believe would be required to pay a third party to assume the performance obligations. The estimated costs to fulfill the performance obligations were based on the historical direct costs for delivering similar services. As a result, in allocating the purchase price, we recorded $9.8 million of current and long-term contract liabilities, representing the estimated fair value of undelivered performance obligations for which payment had been received, which will be recognized as revenue as the underlying performance obligations are delivered. For undelivered performance obligations for which payment had not been received, we recorded a $10.2 million asset as a component of the purchase price allocation, representing the estimated fair value of these obligations, $5.5 million of which is included within prepaid expenses and other current assets, and $4.7 million of which is included in other assets. We are amortizing this asset over the underlying delivery periods, which adjusts the revenue we recognize for providing these services to its estimated fair value.
Transaction and related costs directly related to the acquisition of ForeSee, consisting primarily of professional fees and integration expenses, were $3.5 million and $3.3 million for the years ended January 31, 2020 and 2019, respectively, and were expensed as incurred and are included in selling, general and administrative expenses.
Revenue attributable to ForeSee included in our consolidated statement of operations for the year ended January 31, 2019 was not material. A loss before provision (benefit) for income taxes of $6.0 million attributable to ForeSee is included in our consolidated statement of operations for the year ended January 31, 2019.
The following table sets forth the components and the allocation of the purchase price for our acquisition of ForeSee, including adjustments identified subsequent to the valuation date, none of which were material:
|
|
|
|
|
|
(in thousands)
|
|
Amount
|
Components of Purchase Price:
|
|
|
Cash
|
|
$
|
58,901
|
|
Deferred purchase price consideration
|
|
6,000
|
|
Other purchase price adjustments
|
|
262
|
|
Total purchase price
|
|
$
|
65,163
|
|
|
|
|
Allocation of Purchase Price:
|
|
|
Net tangible assets (liabilities):
|
|
|
Accounts receivable
|
|
$
|
7,245
|
|
Other current assets, including cash acquired
|
|
8,101
|
|
Other assets
|
|
6,075
|
|
Current and other liabilities
|
|
(12,710
|
)
|
Contract liabilities - current and long-term
|
|
(9,821
|
)
|
Deferred income taxes
|
|
(10,687
|
)
|
Net tangible liabilities
|
|
(11,797
|
)
|
Identifiable intangible assets:
|
|
|
Customer relationships
|
|
19,400
|
|
Developed technology
|
|
20,000
|
|
Trademarks and trade names
|
|
3,300
|
|
Total identifiable intangible assets
|
|
42,700
|
|
Goodwill
|
|
34,260
|
|
Total purchase price allocation
|
|
$
|
65,163
|
|
The acquired customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of five years and nine years, four years, and four years, respectively, the weighted average of which is approximately 6.1 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.
Other Business Combinations
During the year ended January 31, 2019, we completed three other business combinations:
|
|
•
|
On July 18, 2018, we completed the acquisition of a business that has been integrated into our Customer Engagement operating segment.
|
|
|
•
|
On November 8, 2018, we completed the acquisition of a business that has been integrated into our Cyber Intelligence operating segment, in which we had a $2.2 million, or approximately 19%, noncontrolling equity investment prior to the acquisition.
|
|
|
•
|
On November 9, 2018, we acquired certain technology and other assets for use in our Customer Engagement operating segment in a transaction that qualified as a business combination.
|
These business combinations were not individually material to our consolidated financial statements.
The combined consideration for these business combinations was approximately $51.3 million, including $33.1 million of combined cash paid at the closings. For two of these business combinations, we also agreed to make potential additional cash payments to the respective former stockholders aggregating up to approximately $35.5 million, contingent upon the achievement of certain performance targets over periods extending through January 2021. The fair value of these contingent consideration obligations was estimated to be $15.9 million at the applicable acquisition dates. The acquisition date fair value of our previously held equity interest was approximately $2.2 million and was included in the measurement of the consideration transferred. Cash paid for these business combinations was funded by cash on hand.
The purchase prices for these business combinations were allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the remaining unallocated purchase prices recorded as goodwill. The fair value assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management.
Included among the factors contributing to the recognition of goodwill in these transactions were synergies in products and technologies, and the addition of skilled, assembled workforces. Of the $25.1 million of goodwill associated with these business combinations, $14.3 million and $10.8 million was assigned to our Customer Engagement and Cyber Intelligence segments, respectively, and for income tax purposes is not deductible.
Revenue and net income (loss) attributable to these business combinations for the year ended January 31, 2019 were not material.
Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to these business combinations, totaled $0.9 million for each of the years ended January 31, 2020 and 2019, respectively. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.
The purchase price allocations for the business combinations completed during the year ended January 31, 2019 are final.
The following table sets forth the components and the allocations of the combined purchase prices for the business combinations, other than ForeSee, completed during the year ended January 31, 2019, including adjustments identified subsequent to the respective valuation dates, none of which were material:
|
|
|
|
|
|
(in thousands)
|
|
Amount
|
Components of Purchase Prices:
|
|
|
Cash
|
|
$
|
33,138
|
|
Fair value of contingent consideration
|
|
15,875
|
|
Fair value of previously held equity interest
|
|
2,239
|
|
Total purchase prices
|
|
$
|
51,252
|
|
|
|
|
Allocation of Purchase Prices:
|
|
|
Net tangible assets (liabilities):
|
|
|
Accounts receivable
|
|
$
|
1,897
|
|
Other current assets, including cash acquired
|
|
6,901
|
|
Other assets
|
|
9,432
|
|
Current and other liabilities
|
|
(2,151
|
)
|
Contract liabilities - current and long-term
|
|
(771
|
)
|
Deferred income taxes
|
|
(7,914
|
)
|
Net tangible assets
|
|
7,394
|
|
Identifiable intangible assets:
|
|
|
Customer relationships
|
|
7,521
|
|
Developed technology
|
|
10,692
|
|
Trademarks and trade names
|
|
500
|
|
Total identifiable intangible assets
|
|
18,713
|
|
Goodwill
|
|
25,145
|
|
Total purchase price allocations
|
|
$
|
51,252
|
|
For these business combinations, customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of from seven years to ten years, three years to five years, and four years, respectively, the weighted average of which is approximately 6.6 years.
Year Ended January 31, 2018
During the year ended January 31, 2018, we completed seven business combinations:
|
|
•
|
On February 1, March 20, October 3, November 3, December 19, and December 21, 2017, we completed acquisitions of businesses that were integrated into our Customer Engagement operating segment. One of the transactions was an asset acquisition that qualified as a business combination, and another of which retained a noncontrolling interest.
|
|
|
•
|
On July 1, 2017, we completed the acquisition of a business that was integrated into our Cyber Intelligence operating segment.
|
These business combinations were not individually material to our consolidated financial statements.
The combined consideration for these business combinations was approximately $134.8 million, including $106.0 million of combined cash paid at the closings. For five of these business combinations, we also agreed to make potential additional cash payments to the respective former stockholders aggregating up to approximately $47.3 million, contingent upon the achievement of certain performance targets over periods extending through January 2022. The fair value of these contingent consideration obligations was estimated to be $25.9 million at the applicable acquisition dates. Cash paid for these business combinations was funded by cash on hand.
The purchase prices for these business combinations were allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the remaining unallocated purchase prices recorded as goodwill. The fair value assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management.
Included among the factors contributing to the recognition of goodwill in these transactions were synergies in products and technologies, and the addition of skilled, assembled workforces. Of the $80.2 million of goodwill associated with these business combinations, $76.4 million and $3.8 million was assigned to our Customer Engagement and Cyber Intelligence
segments, respectively. For income tax purposes, $14.5 million of this goodwill is deductible and $65.7 million is not deductible.
Revenue and the impact on net loss attributable to these business combinations for the year ended January 31, 2018 were not material.
Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to these business combinations, totaled $0.4 million, $2.5 million and $4.9 million for the years ended January 31, 2020, 2019 and 2018, respectively. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.
The purchase price allocations for the business combinations completed during the year ended January 31, 2018 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, 2018, including adjustments identified subsequent to the respective valuation dates, none of which were material:
|
|
|
|
|
|
(in thousands)
|
|
Amount
|
Components of Purchase Prices:
|
|
|
|
Cash
|
|
$
|
106,049
|
|
Fair value of contingent consideration
|
|
25,874
|
|
Other purchase price adjustments
|
|
2,897
|
|
Total purchase prices
|
|
$
|
134,820
|
|
|
|
|
Allocation of Purchase Prices:
|
|
|
|
Net tangible assets (liabilities):
|
|
|
|
Accounts receivable
|
|
$
|
4,184
|
|
Other current assets, including cash acquired
|
|
15,108
|
|
Other assets
|
|
2,765
|
|
Current and other liabilities
|
|
(12,512
|
)
|
Contract liabilities - current and long-term
|
|
(4,424
|
)
|
Deferred income taxes
|
|
(7,381
|
)
|
Net tangible liabilities
|
|
(2,260
|
)
|
Identifiable intangible assets:
|
|
|
|
Customer relationships
|
|
24,812
|
|
Developed technology
|
|
29,614
|
|
Trademarks and trade names
|
|
2,456
|
|
Total identifiable intangible assets
|
|
56,882
|
|
Goodwill
|
|
80,198
|
|
Total purchase price allocations
|
|
$
|
134,820
|
|
For these business combinations, customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of from three years to ten years, from three years to eight years, and from one year to seven years, respectively, the weighted average of which is approximately 6.8 years.
Other Business Combination Information
The pro forma impact of all business combinations completed during the three years ended January 31, 2020 was not material to our historical consolidated operating results and is therefore not presented.
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 consolidated statements of operations. Changes in the fair
value of the contingent consideration obligations result from changes in discount periods and rates, and changes in probability assumptions with respect to the likelihood of achieving the performance targets.
For the years ended January 31, 2020, 2019, and 2018, we recorded benefits of $0.5 million, $3.6 million, and $8.3 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 $42.9 million at January 31, 2020, of which $22.9 million was recorded within accrued expenses and other current liabilities, and $20.0 million was recorded within other liabilities.
Payments of contingent consideration earned under these agreements were $33.1 million, $13.6 million, and $9.4 million for the years ended January 31, 2020, 2019, and 2018, respectively.
Divestiture
In January 2020, we completed the sale of an insignificant subsidiary in our Customer Engagement segment, which qualified as a separate business, as it no longer fit with our strategic direction or growth targets. In accordance with the terms of the sale agreement, the aggregate purchase price is equal to a percentage of net sales of the former subsidiary’s products during the thirty-six month period following the transaction closing date. We determined the estimated fair value of the contingent consideration with the assistance of a third-party valuation specialist and estimates made by management. The transaction reduced goodwill by $1.1 million and intangible assets by $1.9 million. The transaction resulted in a loss of approximately $2.2 million, which was recorded as part of selling, general, and administrative expenses in our consolidated statement of operations.
|
|
6.
|
INTANGIBLE ASSETS AND GOODWILL
|
Acquisition-related intangible assets consisted of the following as of January 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2020
|
(in thousands)
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
465,130
|
|
|
$
|
(328,069
|
)
|
|
$
|
137,061
|
|
Acquired technology
|
|
294,841
|
|
|
(241,585
|
)
|
|
53,256
|
|
Trade names
|
|
12,957
|
|
|
(6,783
|
)
|
|
6,174
|
|
Distribution network
|
|
4,440
|
|
|
(4,440
|
)
|
|
—
|
|
Non-competition agreements
|
|
1,307
|
|
|
(34
|
)
|
|
1,273
|
|
Total intangible assets
|
|
$
|
778,675
|
|
|
$
|
(580,911
|
)
|
|
$
|
197,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2019
|
(in thousands)
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
452,918
|
|
|
$
|
(299,549
|
)
|
|
$
|
153,369
|
|
Acquired technology
|
|
285,230
|
|
|
(221,145
|
)
|
|
64,085
|
|
Trade names
|
|
12,859
|
|
|
(5,130
|
)
|
|
7,729
|
|
Distribution network
|
|
4,440
|
|
|
(4,440
|
)
|
|
—
|
|
Total intangible assets
|
|
$
|
755,447
|
|
|
$
|
(530,264
|
)
|
|
$
|
225,183
|
|
The following table presents net acquisition-related intangible assets by reportable segment as of January 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Customer Engagement
|
|
$
|
189,896
|
|
|
$
|
218,738
|
|
Cyber Intelligence
|
|
7,868
|
|
|
6,445
|
|
Total
|
|
$
|
197,764
|
|
|
$
|
225,183
|
|
Total amortization expense recorded for acquisition-related intangible assets was $55.4 million, $56.4 million, and $72.4 million for the years ended January 31, 2020, 2019, and 2018, respectively. The reported amount of net acquisition-related intangible assets can fluctuate from the impact of changes in foreign currency exchange rates on intangible assets not denominated in U.S. dollars.
Estimated future amortization expense on finite-lived acquisition-related intangible assets is as follows:
|
|
|
|
|
|
(in thousands)
|
|
|
|
Years Ending January 31,
|
|
Amount
|
2021
|
|
$
|
50,083
|
|
2022
|
|
46,645
|
|
2023
|
|
38,570
|
|
2024
|
|
28,262
|
|
2025
|
|
11,814
|
|
Thereafter
|
|
22,390
|
|
Total
|
|
$
|
197,764
|
|
During the years ended January 31, 2020 and 2018, we recorded $0.1 million and $3.3 million, respectively, of impairments for certain acquired trade names and customer-related intangible assets, which is included within selling, general and administrative expenses. No impairments of acquired intangible assets were recorded during the year ended January 31, 2019.
Goodwill activity for the years ended January 31, 2020, and 2019, in total and by reportable segment, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segment
|
(in thousands)
|
|
Total
|
|
Customer Engagement
|
|
Cyber Intelligence
|
Year Ended January 31, 2019:
|
|
|
|
|
|
|
Goodwill, gross, at January 31, 2018
|
|
$
|
1,455,164
|
|
|
$
|
1,307,136
|
|
|
$
|
148,028
|
|
Accumulated impairment losses through January 31, 2018
|
|
(66,865
|
)
|
|
(56,043
|
)
|
|
(10,822
|
)
|
Goodwill, net, at January 31, 2018
|
|
1,388,299
|
|
|
1,251,093
|
|
|
137,206
|
|
Business combinations, including adjustments to prior period acquisitions
|
|
59,035
|
|
|
48,225
|
|
|
10,810
|
|
Foreign currency translation and other
|
|
(29,853
|
)
|
|
(28,991
|
)
|
|
(862
|
)
|
Goodwill, net, at January 31, 2019
|
|
$
|
1,417,481
|
|
|
$
|
1,270,327
|
|
|
$
|
147,154
|
|
|
|
|
|
|
|
|
Year Ended January 31, 2020:
|
|
|
|
|
|
|
Goodwill, gross, at January 31, 2019
|
|
$
|
1,484,346
|
|
|
$
|
1,326,370
|
|
|
$
|
157,976
|
|
Accumulated impairment losses through January 31, 2019
|
|
(66,865
|
)
|
|
(56,043
|
)
|
|
(10,822
|
)
|
Goodwill, net, at January 31, 2019
|
|
1,417,481
|
|
|
1,270,327
|
|
|
147,154
|
|
Business combinations, including adjustments to prior period acquisitions
|
|
51,301
|
|
|
39,704
|
|
|
11,597
|
|
Foreign currency translation and other
|
|
429
|
|
|
1,037
|
|
|
(608
|
)
|
Goodwill, net, at January 31, 2020
|
|
$
|
1,469,211
|
|
|
$
|
1,311,068
|
|
|
$
|
158,143
|
|
|
|
|
|
|
|
|
Balance at January 31, 2020
|
|
|
|
|
|
|
|
|
|
Goodwill, gross, at January 31, 2020
|
|
$
|
1,536,076
|
|
|
$
|
1,367,111
|
|
|
$
|
168,965
|
|
Accumulated impairment losses through January 31, 2020
|
|
(66,865
|
)
|
|
(56,043
|
)
|
|
(10,822
|
)
|
Goodwill, net, at January 31, 2020
|
|
$
|
1,469,211
|
|
|
$
|
1,311,068
|
|
|
$
|
158,143
|
|
For purposes of reviewing for potential goodwill impairment, we have three reporting units, consisting of Customer Engagement, Cyber Intelligence (excluding situational intelligence solutions), and Situational Intelligence, which is a
component of our Cyber Intelligence operating segment. Based on our November 1, 2019 quantitative goodwill impairment reviews, we concluded that the estimated fair values of all of our reporting units significantly exceeded their carrying values. Based on our November 1, 2018 goodwill impairment qualitative review of each reporting unit, we determined that it is more likely than not that the fair value of each of our reporting units substantially exceeds the respective carrying amounts. Accordingly, there was no indication of impairment and a quantitative goodwill impairment test was not performed.
No changes in circumstances or indicators of potential impairment were identified between November 1 and January 31 in each of the years ended January 31, 2020 and 2019.
No goodwill impairment was identified for the years ended January 31, 2020, 2019, and 2018.
The following table summarizes our long-term debt at January 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
1.50% Convertible Senior Notes
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
June 2017 Term Loan
|
|
414,375
|
|
|
418,625
|
|
Borrowings under 2017 Revolving Credit Facility
|
|
45,000
|
|
|
—
|
|
Other debt
|
|
—
|
|
|
92
|
|
Less: Unamortized debt discounts and issuance costs
|
|
(22,327
|
)
|
|
(36,589
|
)
|
Total debt
|
|
837,048
|
|
|
782,128
|
|
Less: current maturities
|
|
4,250
|
|
|
4,343
|
|
Long-term debt
|
|
$
|
832,798
|
|
|
$
|
777,785
|
|
1.50% Convertible Senior Notes
On June 18, 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes due June 1, 2021 (“Notes”), unless earlier converted by the holders pursuant to their terms. Net proceeds from the Notes after underwriting discounts were $391.9 million. The Notes pay interest in cash semiannually in arrears at a rate of 1.50% per annum.
The Notes were issued concurrently with our public issuance of 5,750,000 shares of common stock, the majority of the combined net proceeds of which were used to partially repay certain indebtedness under a prior credit agreement.
The Notes are unsecured and convertible into, at our election, cash, shares of common stock, or a combination of both, subject to satisfaction of specified conditions and during specified periods. If converted, we currently intend to pay cash in respect of the principal amount of the Notes. We currently expect to refinance the Notes at or prior to maturity with new convertible notes or other debt.
The Notes have a conversion rate of 15.5129 shares of common stock per $1,000 principal amount of Notes, which represents an effective conversion price of approximately $64.46 per share of common stock and would result in the issuance of approximately 6,205,000 shares if all of the Notes were converted. The conversion rate has not changed since issuance of the Notes, although throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events.
On or after December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may surrender their Notes for conversion regardless of whether any of the other specified conditions for conversion have been satisfied. As of January 31, 2020, the Notes were not convertible.
In accordance with accounting guidance for convertible debt with a cash conversion option, we separately accounted for the debt and equity components of the Notes in a manner that reflected our estimated nonconvertible debt borrowing rate. We estimated the debt and equity components of the Notes to be $319.9 million and $80.1 million respectively, at the issuance date assuming a 5.00% non-convertible borrowing rate. The equity component was recorded as an increase to additional paid-in capital. The excess of the principal amount of the debt component over its carrying amount (the “debt discount”) is being amortized as interest expense over the term of the Notes using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
We allocated transaction costs related to the issuance of the Notes, including underwriting discounts, of $7.6 million and $1.9 million to the debt and equity components, respectively. Issuance costs attributable to the debt component of the Notes are presented as a reduction of long-term debt and are being amortized as interest expense over the term of the Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital. The carrying amount of the equity component, net of issuance costs, was $78.2 million at January 31, 2020.
As of January 31, 2020, the carrying value of the debt component was $380.6 million, which is net of unamortized debt discount and issuance costs of $17.7 million and $1.7 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% for each of the years ended January 31, 2020, 2019, and 2018.
Based on the closing market price of our common stock on January 31, 2020, the if-converted value of the Notes was less than the aggregate principal amount of the Notes.
Note Hedges and Warrants
Concurrently with the issuance of the Notes, we entered into convertible note hedge transactions (the “Note Hedges”) and sold warrants (the “Warrants”). The combination of the Note Hedges and the Warrants serves to increase the effective initial conversion price for the Notes to $75.00 per share. The Note Hedges and Warrants are each separate instruments from the Notes.
Note Hedges
Pursuant to the Note Hedges, we purchased call options on our common stock, under which we have the right to acquire from the counterparties up to approximately 6,205,000 shares of our common stock, subject to customary anti-dilution adjustments, at a price of $64.46, which equals the initial conversion price of the Notes. Our exercise rights under the Note Hedges generally trigger upon conversion of the Notes and the Note Hedges terminate upon maturity of the Notes, or the first day the Notes are no longer outstanding. The Note Hedges may be settled in cash, shares of our common stock, or a combination thereof, at our option, and are intended to reduce our exposure to potential dilution upon conversion of the Notes. We paid $60.8 million for the Note Hedges, which was recorded as a reduction to additional paid-in capital. As of January 31, 2020, we had not purchased any shares of our common stock under the Note Hedges.
Warrants
We sold the Warrants to several counterparties. The Warrants provide the counterparties rights to acquire from us up to approximately 6,205,000 shares of our common stock at a price of $75.00 per share. The Warrants expire incrementally on a series of expiration dates beginning in August 2021. At expiration, if the market price per share of our common stock exceeds the strike price of the Warrants, we will be obligated to issue shares of our common stock having a value equal to such excess. The Warrants could have a dilutive effect on net income per share to the extent that the market value of our common stock exceeds the strike price of the Warrants. Proceeds from the sale of the Warrants were $45.2 million and were recorded as additional paid-in capital. As of January 31, 2020, no Warrants had been exercised and all Warrants remained outstanding.
The Note Hedges and Warrants both meet the requirements for classification within stockholders’ equity, and their respective fair values are not remeasured and adjusted as long as these instruments continue to qualify for stockholders’ equity classification.
Credit Agreements
2017 Credit Agreement
On June 29, 2017, we entered into a new credit agreement (the “2017 Credit Agreement”) with certain lenders and terminated the prior credit agreement.
The 2017 Credit Agreement provides for $725.0 million of senior secured credit facilities, comprised of a $425.0 million term loan maturing on June 29, 2024 (the “2017 Term Loan”) and a $300.0 million revolving credit facility maturing on June 29, 2022 (the “2017 Revolving Credit Facility”), subject to increase and reduction from time to time according to the terms of the 2017 Credit Agreement. The maturity dates of the 2017 Term Loan and 2017 Revolving Credit Facility will be accelerated to March 1, 2021 if on such date any Notes remain outstanding.
The majority of the proceeds from the 2017 Term Loan were used to repay all outstanding terms loans under our prior credit agreement.
The 2017 Term Loan was subject to an original issuance discount of approximately $0.5 million. This discount is being amortized as interest expense over the term of the 2017 Term Loan using the effective interest method.
Interest rates on loans under the 2017 Credit Agreement are periodically reset, at our option, at either a Eurodollar Rate or an ABR rate (each as defined in the 2017 Credit Agreement), plus in each case a margin.
On January 31, 2018, we entered into an amendment to the 2017 Credit Agreement (the “2018 Amendment”) providing for, among other things, a reduction of the interest rate margins on the 2017 Term Loan from 2.25% to 2.00% for Eurodollar loans, and from 1.25% to 1.00% for ABR loans. The vast majority of the impact of the 2018 Amendment was accounted for as a debt modification. For the portion of the 2017 Term Loan which was considered extinguished and replaced by new loans, we wrote off $0.2 million of unamortized deferred debt issuance costs as a loss on early retirement of debt during the three months ended January 31, 2018. The remaining unamortized deferred debt issuance costs and discount are being amortized over the remaining term of the 2017 Term Loan.
As of January 31, 2020, the interest rate on the 2017 Term Loan was 3.85%. Taking into account the impact of the original issuance discount and related deferred debt issuance costs, the effective interest rate on the 2017 Term Loan was approximately 4.02% at January 31, 2020. As of January 31, 2019, the interest rate on the 2017 Term Loan was 4.52%.
Borrowings under the 2017 Revolving Credit Facility were $45.0 million at January 31, 2020, which is included in long-term debt on our consolidated balance sheet. For borrowings under the 2017 Revolving Credit Facility, the margin is determined by reference to our Consolidated Total Debt to Consolidated EBITDA (each as defined in the 2017 Credit Agreement) leverage ratio (the “Leverage Ratio”). As of January 31, 2020, the interest rate on our revolving credit facility borrowings was 3.41%. In addition, we are required to pay a commitment fee with respect to unused availability under the 2017 Revolving Credit Facility at rates per annum determined by reference to our Leverage Ratio. The proceeds of borrowings under the 2017 Revolving Credit Facility were used to fund a portion of our new share repurchase program. Please refer to Note 9, “Stockholders’ Equity”, for more information regarding the share repurchase program.
The 2017 Term Loan requires quarterly principal payments of approximately $1.1 million, which commenced on August 1, 2017, with the remaining balance due on June 29, 2024. Optional prepayments of loans under the 2017 Credit Agreement are generally permitted without premium or penalty.
Our obligations under the 2017 Credit Agreement are guaranteed by each of our direct and indirect existing and future material domestic wholly owned restricted subsidiaries, and are secured by a security interest in substantially all of our assets and the assets of the guarantor subsidiaries, subject to certain exceptions.
The 2017 Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this type. The 2017 Credit Agreement also contains a financial covenant that, solely with respect to the 2017 Revolving Credit Facility, requires us to maintain a Leverage Ratio of no greater than 4.50 to 1. The limitations imposed by the covenants are subject to certain exceptions as detailed in the 2017 Credit Agreement.
The 2017 Credit Agreement provides for events of default with corresponding grace periods that we believe are customary for credit facilities of this type. Upon an event of default, all of our obligations owed under the 2017 Credit Agreement may be declared immediately due and payable, and the lenders’ commitments to make loans under the 2017 Credit Agreement may be terminated.
Subsequent Event
Subsequent to the year ended January 31, 2020, we increased the borrowings under our 2017 Revolving Credit Facility. As of the date of this report, we have a total of $200.0 million outstanding under the revolving credit facility, which currently bears interest at a weighted average rate of 2.8% per annum.
Loss on Early Retirement of 2014 Term Loans
Our prior credit agreement provided for senior secured credit facilities, comprised of $943.5 million of term loans, of which $300.0 million was borrowed in February 2014 and $643.5 million was borrowed in March 2014 (together, the “2014 Term Loans”), the outstanding portion of which was scheduled to mature in September 2019, and a $300.0 million revolving credit
facility (the “Prior Revolving Credit Facility”), which was scheduled to mature in September 2018, subject to increase and reduction from time to time, in accordance with the terms of the prior credit agreement.
At the June 29, 2017 closing date of the 2017 Credit Agreement, there were $3.2 million of unamortized deferred debt issuance costs and a $0.1 million unamortized term loan discount associated with the 2014 Term Loans and the Prior Revolving Credit Facility. Of the $3.2 million of unamortized deferred debt issuance costs, $1.4 million was associated with commitments under the Prior Revolving Credit Facility provided by lenders that are continuing to provide commitments under the 2017 Revolving Credit Facility and therefore continued to be deferred, and are being amortized on a straight-line basis over the term of the 2017 Revolving Credit Facility. The remaining $1.8 million of unamortized deferred debt issuance costs and the $0.1 million unamortized discount, all of which related to the 2014 Term Loans, were written off as a $1.9 million loss on early retirement of debt during the three months ended July 31, 2017.
2017 Credit Agreement Issuance Costs
We incurred debt issuance costs of approximately $6.8 million in connection with the 2017 Credit Agreement, of which $4.1 million were associated with the 2017 Term Loan and $2.7 million were associated with the 2017 Revolving Credit Facility, which were deferred and are being amortized as interest expense over the terms of the facilities under the 2017 Credit Agreement. As noted previously, during the three months ended January 31, 2018, we wrote off $0.2 million of deferred debt issuance costs associated with the 2017 Term Loan as a result of the 2018 Amendment. Deferred debt issuance costs associated with the 2017 Term Loan are being amortized using the effective interest rate method, and deferred debt issuance costs associated with the 2017 Revolving Credit Facility are being amortized on a straight-line basis.
Future Principal Payments on Term Loans
As of January 31, 2020, future scheduled principal payments on the 2017 Term Loan were as follows:
|
|
|
|
|
|
(in thousands)
|
|
|
Years Ending January 31,
|
|
Amount
|
2021
|
|
$
|
4,250
|
|
2022
|
|
4,250
|
|
2023
|
|
4,250
|
|
2024
|
|
4,250
|
|
2025
|
|
397,375
|
|
Total
|
|
$
|
414,375
|
|
Interest Expense
The following table presents the components of interest expense incurred on the Notes and on borrowings under our credit agreements for the years ended January 31, 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
1.50% Convertible Senior Notes:
|
|
|
|
|
|
|
Interest expense at 1.50% coupon rate
|
|
$
|
6,000
|
|
|
$
|
6,000
|
|
|
$
|
6,000
|
|
Amortization of debt discount
|
|
12,490
|
|
|
11,850
|
|
|
11,244
|
|
Amortization of deferred debt issuance costs
|
|
1,177
|
|
|
1,118
|
|
|
1,060
|
|
Total Interest Expense - 1.50% Convertible Senior Notes
|
|
$
|
19,667
|
|
|
$
|
18,968
|
|
|
$
|
18,304
|
|
|
|
|
|
|
|
|
Borrowings under Credit Agreements:
|
|
|
|
|
|
|
Interest expense at contractual rates
|
|
$
|
18,021
|
|
|
$
|
17,741
|
|
|
$
|
15,412
|
|
Impact of interest rate swap agreement
|
|
792
|
|
|
—
|
|
|
254
|
|
Amortization of debt discounts
|
|
68
|
|
|
67
|
|
|
65
|
|
Amortization of deferred debt issuance costs
|
|
1,569
|
|
|
1,554
|
|
|
1,839
|
|
Total Interest Expense - Borrowings under Credit Agreements
|
|
$
|
20,450
|
|
|
$
|
19,362
|
|
|
$
|
17,570
|
|
|
|
8.
|
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT INFORMATION
|
Consolidated Balance Sheets
Inventories consisted of the following as of January 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Raw materials
|
|
$
|
9,628
|
|
|
$
|
10,875
|
|
Work-in-process
|
|
4,749
|
|
|
5,567
|
|
Finished goods
|
|
6,118
|
|
|
8,510
|
|
Total inventories
|
|
$
|
20,495
|
|
|
$
|
24,952
|
|
Property and equipment, net consisted of the following as of January 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Land and buildings
|
|
$
|
10,754
|
|
|
$
|
10,632
|
|
Leasehold improvements
|
|
35,463
|
|
|
31,694
|
|
Software
|
|
53,606
|
|
|
51,950
|
|
Equipment, furniture, and other
|
|
199,268
|
|
|
164,351
|
|
Total cost
|
|
299,091
|
|
|
258,627
|
|
Less: accumulated depreciation and amortization
|
|
(182,980
|
)
|
|
(158,493
|
)
|
Total property and equipment, net
|
|
$
|
116,111
|
|
|
$
|
100,134
|
|
Depreciation expense on property and equipment was $28.5 million, $25.5 million, and $26.0 million in the years ended January 31, 2020, 2019, and 2018, respectively.
Other assets consisted of the following as of January 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Deferred commissions
|
|
$
|
37,263
|
|
|
$
|
29,815
|
|
Capitalized software development costs, net
|
|
27,030
|
|
|
13,342
|
|
Long-term restricted cash and time deposits
|
|
26,362
|
|
|
23,193
|
|
Long-term deferred cost of revenue
|
|
6,345
|
|
|
4,630
|
|
Deferred debt issuance costs, net
|
|
2,005
|
|
|
2,836
|
|
Long-term security deposits
|
|
1,920
|
|
|
3,760
|
|
Other
|
|
17,038
|
|
|
19,267
|
|
Total other assets
|
|
$
|
117,963
|
|
|
$
|
96,843
|
|
Accrued expenses and other current liabilities consisted of the following as of January 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Compensation and benefits
|
|
$
|
100,225
|
|
|
$
|
96,703
|
|
Contingent consideration - current portion
|
|
22,859
|
|
|
28,415
|
|
Operating lease obligations - current portion
|
|
22,656
|
|
|
1,794
|
|
Taxes other than income taxes
|
|
18,642
|
|
|
20,428
|
|
Income taxes
|
|
15,084
|
|
|
7,497
|
|
Distributor and agent commissions
|
|
10,097
|
|
|
11,446
|
|
Professional and consulting fees
|
|
4,367
|
|
|
3,929
|
|
Other
|
|
35,768
|
|
|
38,269
|
|
Total accrued expenses and other current liabilities
|
|
$
|
229,698
|
|
|
$
|
208,481
|
|
Other liabilities consisted of the following as of January 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Unrecognized tax benefits, including interest and penalties
|
|
$
|
22,355
|
|
|
$
|
33,063
|
|
Contingent consideration - long-term portion
|
|
20,017
|
|
|
32,925
|
|
Derivative financial instruments - long-term portion
|
|
11,441
|
|
|
3,906
|
|
Finance lease obligations - long-term portion
|
|
7,210
|
|
|
3,067
|
|
Obligations for severance compensation
|
|
2,627
|
|
|
2,601
|
|
Deferred rent expense
|
|
—
|
|
|
12,254
|
|
Other
|
|
3,505
|
|
|
5,536
|
|
Total other liabilities
|
|
$
|
67,155
|
|
|
$
|
93,352
|
|
Consolidated Statements of Operations
Other income (expense), net consisted of the following for the years ended January 31, 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Foreign currency (losses) gains, net
|
|
$
|
(56
|
)
|
|
$
|
(5,519
|
)
|
|
$
|
6,760
|
|
Gains (losses) on derivative financial instruments, net
|
|
599
|
|
|
2,511
|
|
|
(17
|
)
|
Other, net
|
|
(338
|
)
|
|
(898
|
)
|
|
(841
|
)
|
Total other income (expense), net
|
|
$
|
205
|
|
|
$
|
(3,906
|
)
|
|
$
|
5,902
|
|
Consolidated Statements of Cash Flows
The following table provides supplemental information regarding our consolidated cash flows for the years ended January 31, 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Cash paid for interest
|
|
$
|
23,232
|
|
|
$
|
22,258
|
|
|
$
|
24,402
|
|
Cash payments of income taxes, net
|
|
$
|
15,391
|
|
|
$
|
26,887
|
|
|
$
|
23,450
|
|
Non-cash investing and financing transactions:
|
|
|
|
|
|
|
|
Liabilities for contingent consideration in business combinations
|
|
$
|
15,253
|
|
|
$
|
15,944
|
|
|
$
|
27,605
|
|
Finance leases of property and equipment
|
|
$
|
6,404
|
|
|
$
|
1,137
|
|
|
$
|
4,350
|
|
Accrued but unpaid purchases of property and equipment
|
|
$
|
4,362
|
|
|
$
|
3,376
|
|
|
$
|
2,367
|
|
Accrued but unpaid purchases of treasury stock
|
|
$
|
2,846
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Leasehold improvements funded by lease incentives
|
|
$
|
2,604
|
|
|
$
|
1,397
|
|
|
$
|
—
|
|
Inventory transfers to property and equipment
|
|
$
|
825
|
|
|
$
|
1,699
|
|
|
$
|
437
|
|
Contingent receivable in exchange for sale of subsidiary
|
|
$
|
738
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Common Stock Dividends
We did not declare or pay any dividends on our common stock during the years ended January 31, 2020, 2019, and 2018. Under the terms of our 2017 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 common stock repurchase program of up to $150.0 million over two years. This program expired on March 29, 2018. We made a total of $46.9 million in repurchases under the program.
On December 4, 2019, we announced that our board of directors had authorized a new share repurchase program whereby we may repurchase up to $300.0 million of common stock over the period ending on February 1, 2021. We made $116.1 million in repurchases under the program during the year ended January 31, 2020.
Treasury Stock
Repurchased shares of common stock are recorded as treasury stock, at cost, but may from time to time be retired. At January 31, 2020, we held approximately 3,791,000 shares of treasury stock with a cost of $174.1 million. At January 31, 2019, we held approximately 1,665,000 and shares of treasury stock with a cost of $57.6 million.
During the year ended January 31, 2020 we acquired approximately 2,126,000 shares of treasury stock for a cost of $116.5 million, which includes $116.1 million of share repurchases under the new share repurchase program described above and other repurchases to facilitate income tax withholding upon vesting of equity awards. During the year ended January 31, 2019 we acquired approximately 4,000 shares of treasury stock for a cost of $0.2 million. During the year ended January 31, 2018 we received approximately 7,000 shares of treasury stock in a nonmonetary transaction valued at $0.3 million.
From time to time, our board of directors has approved limited programs to repurchase shares of our common stock from directors or officers in connection with the vesting of restricted stock or restricted stock units to facilitate required income tax withholding by us or the payment of required income taxes by such holders. In addition, the terms of some of our equity award agreements with all grantees provide for automatic repurchases by us for the same purpose if a vesting-related or delivery-related tax event occurs at a time when the holder is not permitted to sell shares in the market. Our stock bonus program contains similar terms. Any such repurchases of common stock occur at prevailing market prices and are recorded as treasury stock.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes items such as foreign currency translation adjustments and unrealized gains and losses on 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 consolidated balance sheets. Accumulated other comprehensive income (loss) items have no impact on our net income (loss) as presented in our consolidated statements of operations.
The following table summarizes changes in the components of our accumulated other comprehensive income (loss) for the years ended January 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Unrealized Gains (Losses) on Derivative Financial Instruments Designated as Hedges
|
|
Unrealized Gain on Interest Rate Swap Designated as Hedge
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
Accumulated other comprehensive income (loss) at January 31, 2018
|
|
$
|
3,312
|
|
|
$
|
—
|
|
|
$
|
(106,772
|
)
|
|
$
|
(103,460
|
)
|
Other comprehensive loss before reclassifications
|
|
(8,083
|
)
|
|
(3,043
|
)
|
|
(34,429
|
)
|
|
(45,555
|
)
|
Amounts reclassified out of accumulated other comprehensive income (loss)
|
|
(3,790
|
)
|
|
—
|
|
|
—
|
|
|
(3,790
|
)
|
Net other comprehensive loss
|
|
(4,293
|
)
|
|
(3,043
|
)
|
|
(34,429
|
)
|
|
(41,765
|
)
|
Accumulated other comprehensive loss at January 31, 2019
|
|
(981
|
)
|
|
(3,043
|
)
|
|
(141,201
|
)
|
|
(145,225
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
2,015
|
|
|
(8,102
|
)
|
|
(762
|
)
|
|
(6,849
|
)
|
Amounts reclassified out of accumulated other comprehensive loss
|
|
408
|
|
|
(617
|
)
|
|
—
|
|
|
(209
|
)
|
Net other comprehensive income (loss)
|
|
1,607
|
|
|
(7,485
|
)
|
|
(762
|
)
|
|
(6,640
|
)
|
Accumulated other comprehensive income (loss) at January 31, 2020
|
|
$
|
626
|
|
|
$
|
(10,528
|
)
|
|
$
|
(141,963
|
)
|
|
$
|
(151,865
|
)
|
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 consolidated statement of operations, with presentation location, for the years ended January 31, 2020, 2019, and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
|
Financial Statement Location
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
Unrealized gains (losses) on derivative financial instruments:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
11
|
|
|
$
|
(350
|
)
|
|
$
|
621
|
|
|
Cost of product revenue
|
|
|
64
|
|
|
(388
|
)
|
|
599
|
|
|
Cost of service and support revenue
|
|
|
250
|
|
|
(2,138
|
)
|
|
3,577
|
|
|
Research and development, net
|
|
|
128
|
|
|
(1,343
|
)
|
|
2,016
|
|
|
Selling, general and administrative
|
|
|
453
|
|
|
(4,219
|
)
|
|
6,813
|
|
|
Total, before income taxes
|
|
|
(45
|
)
|
|
429
|
|
|
(683
|
)
|
|
(Provision) benefit for income taxes
|
|
|
$
|
408
|
|
|
$
|
(3,790
|
)
|
|
$
|
6,130
|
|
|
Total, net of income taxes
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreement
|
|
$
|
(792
|
)
|
|
$
|
—
|
|
|
$
|
(254
|
)
|
|
Interest expense
|
|
|
—
|
|
|
—
|
|
|
934
|
|
|
Other income (expense), net
|
|
|
(792
|
)
|
|
—
|
|
|
680
|
|
|
Total, before income taxes
|
|
|
175
|
|
|
—
|
|
|
(389
|
)
|
|
Benefit (provision) for income taxes
|
|
|
$
|
(617
|
)
|
|
$
|
—
|
|
|
$
|
291
|
|
|
Total, net of income taxes
|
10. RESEARCH AND DEVELOPMENT, NET
Our gross research and development expenses for the years ended January 31, 2020, 2019, and 2018, were $233.1 million, $211.0 million, and $192.6 million, respectively. Reimbursements from the IIA and other government grant programs amounted to $1.4 million, $1.9 million, and $2.0 million for the years ended January 31, 2020, 2019, and 2018, respectively, which were recorded as reductions of gross research and development expenses.
We capitalize certain costs incurred to develop our commercial software products, and we then recognize those costs within cost of product revenue as the products are sold. Activity for our capitalized software development costs for the years ended January 31, 2020, 2019, and 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Capitalized software development costs, net, beginning of year
|
|
$
|
13,342
|
|
|
$
|
9,228
|
|
|
$
|
9,509
|
|
Software development costs capitalized during the year
|
|
17,222
|
|
|
7,320
|
|
|
3,126
|
|
Amortization of capitalized software development costs
|
|
(3,561
|
)
|
|
(3,101
|
)
|
|
(3,338
|
)
|
Foreign currency translation and other
|
|
27
|
|
|
(105
|
)
|
|
(69
|
)
|
Capitalized software development costs, net, end of year
|
|
$
|
27,030
|
|
|
$
|
13,342
|
|
|
$
|
9,228
|
|
There were no material impairments of such capitalized costs during the years ended January 31, 2020, 2019, and 2018.
The components of income (loss) before provision for income taxes for the years ended January 31, 2020, 2019, and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Domestic
|
|
$
|
(49,703
|
)
|
|
$
|
(12,927
|
)
|
|
$
|
(44,502
|
)
|
Foreign
|
|
103,006
|
|
|
90,689
|
|
|
63,402
|
|
Total income before provision for income taxes
|
|
$
|
53,303
|
|
|
$
|
77,762
|
|
|
$
|
18,900
|
|
The provision for income taxes for the years ended January 31, 2020, 2019, and 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Current provision (benefit) for income taxes:
|
|
|
|
|
|
|
Federal
|
|
$
|
8,683
|
|
|
$
|
(1,582
|
)
|
|
$
|
4,364
|
|
State
|
|
1,033
|
|
|
2,299
|
|
|
1,215
|
|
Foreign
|
|
5,759
|
|
|
9,842
|
|
|
24,308
|
|
Total current provision for income taxes
|
|
15,475
|
|
|
10,559
|
|
|
29,887
|
|
Deferred provision (benefit) for income taxes:
|
|
|
|
|
|
|
Federal
|
|
(4,096
|
)
|
|
(4,099
|
)
|
|
4,734
|
|
State
|
|
948
|
|
|
(2,687
|
)
|
|
(58
|
)
|
Foreign
|
|
5,293
|
|
|
3,769
|
|
|
(12,209
|
)
|
Total deferred provision (benefit) for income taxes
|
|
2,145
|
|
|
(3,017
|
)
|
|
(7,533
|
)
|
Total provision for income taxes
|
|
$
|
17,620
|
|
|
$
|
7,542
|
|
|
$
|
22,354
|
|
The reconciliation of the U.S. federal statutory rate to our effective tax rate on income (loss) before provision for income taxes for the years ended January 31, 2020, 2019, and 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
U.S. federal statutory income tax rate
|
|
21.0
|
%
|
|
21.0
|
%
|
|
33.8
|
%
|
|
|
|
|
|
|
|
Income tax provision at the U.S. federal statutory rate
|
|
$
|
11,193
|
|
|
$
|
16,330
|
|
|
$
|
6,394
|
|
State income tax provision
|
|
230
|
|
|
3,968
|
|
|
1,792
|
|
Foreign tax rate differential
|
|
11,700
|
|
|
9,516
|
|
|
(9,434
|
)
|
Tax incentives
|
|
(8,395
|
)
|
|
(7,377
|
)
|
|
(3,891
|
)
|
Valuation allowances
|
|
1,607
|
|
|
(24,099
|
)
|
|
14,539
|
|
Stock-based and other compensation
|
|
(2,143
|
)
|
|
678
|
|
|
(8,656
|
)
|
Non-deductible expenses
|
|
2,752
|
|
|
(412
|
)
|
|
(2,091
|
)
|
Tax contingencies
|
|
(11,550
|
)
|
|
(3,035
|
)
|
|
5,017
|
|
U.S. tax effects of foreign operations
|
|
11,963
|
|
|
11,559
|
|
|
8,591
|
|
Impact of the 2017 Tax Act
|
|
—
|
|
|
—
|
|
|
9,641
|
|
Other, net
|
|
263
|
|
|
414
|
|
|
452
|
|
Total provision for income taxes
|
|
$
|
17,620
|
|
|
$
|
7,542
|
|
|
$
|
22,354
|
|
Effective income tax rate
|
|
33.1
|
%
|
|
9.7
|
%
|
|
118.3
|
%
|
The table above reflects January 31, 2020 and 2019 U.S. federal statutory income tax rates of 21.0% and January 31, 2018 U.S. federal statutory income tax rate of 33.8% due to the 2017 Tax Act. The 2017 Tax Act includes a reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%. Section 15 of the Internal Revenue Code stipulates that our fiscal year ending January 31, 2018 had a blended corporate tax rate of 33.8% which is based on the applicable tax rates before and after the 2017 Tax Act and the number of days in the year.
Our operations in Israel have been granted “Approved Enterprise” (“AE”) status by the Investment Center of the Israeli Ministry of Industry, Trade and Labor, which makes us eligible for tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959. Under the terms of the program, income attributable to an approved enterprise is exempt from income tax for a period of two years and is subject to a reduced income tax rate for the subsequent five years to eight years (generally 10% - 23%, depending on the percentage of foreign investment in the company). Our AE status expires between January 31, 2020 and January 31, 2021. Based on the current law, the company qualifies for an alternative tax incentive program as a Preferred Technological Enterprise (“PTE”). Pursuant to Amendment 73 to the Investment Law adopted in 2017, a company located in the Center of Israel that meets the conditions for PTE is subject to a 12% tax rate on eligible income. Income not eligible for PTE benefits is taxed at the regular corporate rate of 23%. In addition, certain operations in Cyprus qualify for favorable tax treatment under the Cypriot Intellectual Property Regime (“IP Regime”). This legislation exempts 80% of income and gains derived from patents, copyrights, and trademarks from taxation. These tax incentives decreased our effective tax rate by 10.1%, 9.0%, and 17.8% for the years ended January 31, 2020, 2019, and 2018, respectively.
Deferred tax assets and liabilities consisted of the following at January 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
|
Accrued expenses
|
|
$
|
3,979
|
|
|
$
|
9,510
|
|
Operating lease liabilities
|
|
15,716
|
|
|
—
|
|
Fair value of derivatives
|
|
3,332
|
|
|
—
|
|
Loss carryforwards
|
|
30,063
|
|
|
25,451
|
|
Tax credits
|
|
7,021
|
|
|
9,239
|
|
Stock-based and other compensation
|
|
14,087
|
|
|
14,646
|
|
Capitalized research and development expenses
|
|
18
|
|
|
8,178
|
|
Total deferred tax assets
|
|
74,216
|
|
|
67,024
|
|
Deferred tax liabilities:
|
|
|
|
|
Deferred cost of revenue
|
|
(7,588
|
)
|
|
(8,173
|
)
|
Goodwill and other intangible assets
|
|
(36,989
|
)
|
|
(41,781
|
)
|
Unremitted earnings of foreign subsidiaries
|
|
(12,257
|
)
|
|
(12,257
|
)
|
Operating lease right-of-use assets
|
|
(12,401
|
)
|
|
—
|
|
Other, net
|
|
(4,674
|
)
|
|
(2,418
|
)
|
Total deferred tax liabilities
|
|
(73,909
|
)
|
|
(64,629
|
)
|
Valuation allowance
|
|
(26,334
|
)
|
|
(24,526
|
)
|
Net deferred tax liabilities
|
|
$
|
(26,027
|
)
|
|
$
|
(22,131
|
)
|
|
|
|
|
|
Recorded as:
|
|
|
|
|
Deferred tax assets
|
|
$
|
13,802
|
|
|
$
|
21,040
|
|
Deferred tax liabilities
|
|
(39,829
|
)
|
|
(43,171
|
)
|
Net deferred tax liabilities
|
|
$
|
(26,027
|
)
|
|
$
|
(22,131
|
)
|
At January 31, 2020, we had U.S. federal NOL carryforwards of approximately $293.5 million. These loss carryforwards expire in various years ending from January 31, 2021 to January 31, 2039. We had state NOL carryforwards of approximately $194.9 million, expiring in years ending from January 31, 2021 to January 31, 2038. We had foreign NOL carryforwards of approximately $93.9 million. At January 31, 2020, all but $6.0 million of these foreign loss carryforwards had indefinite carryforward periods. Certain of these federal, state, and foreign loss carryforwards and credits are subject to Internal Revenue Code Section 382 or similar provisions, which impose limitations on their utilization following certain changes in ownership of the entity generating the loss carryforward. We had U.S. federal, state, and foreign tax credit carryforwards of approximately $11.7 million at January 31, 2020, the utilization of which is subject to limitation. At January 31, 2020, approximately $4.1 million of these tax credit carryforwards may be carried forward indefinitely. The balance of $7.6 million expires in various years ending from January 31, 2021 to January 31, 2038.
We currently intend to continue to indefinitely reinvest a portion of the earnings of our foreign subsidiaries to finance foreign activities. Except to the extent of the U.S. tax provided on earnings of our foreign subsidiaries as of January 31, 2020 and withholding taxes of $15.0 million accrued as of January 31, 2020 with respect to certain identified cash that may be repatriated to the U.S., we have not provided tax on the outside basis difference of foreign subsidiaries nor have we provided for any additional withholding or other tax that may be applicable should a future distribution be made from any unremitted earnings of foreign subsidiaries. Due to complexities in the laws of the foreign jurisdictions and the assumptions that would have to be made, it is not practicable to estimate the total amount of income and withholding taxes that would have to be provided on such earnings.
As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes guidance requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more likely than not realizable, we establish a valuation allowance. We have recorded valuation allowances in the amounts of $26.3 million and $24.5 million at January 31, 2020 and 2019, respectively.
Activity in the recorded valuation allowance consisted of the following for the years ended January 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Valuation allowance, beginning of year
|
|
$
|
(24,526
|
)
|
|
$
|
(55,116
|
)
|
Income tax benefit (provision)
|
|
(1,607
|
)
|
|
24,099
|
|
Adoption of ASU No. 2014-09
|
|
—
|
|
|
5,763
|
|
Business combinations
|
|
—
|
|
|
124
|
|
Currency translation adjustment and other
|
|
(201
|
)
|
|
604
|
|
Valuation allowance, end of year
|
|
$
|
(26,334
|
)
|
|
$
|
(24,526
|
)
|
In accordance with the authoritative guidance on accounting for uncertainty in income taxes, differences between the amount of tax benefits taken or expected to be taken in our income tax returns and the amount of tax benefits recognized in our financial statements, determined by applying the prescribed methodologies of accounting for uncertainty in income taxes, represent our unrecognized income tax benefits, which we either record as a liability or as a reduction of deferred tax assets.
For the years ended January 31, 2020, 2019, and 2018, the aggregate changes in the balance of gross unrecognized tax benefits were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Gross unrecognized tax benefits, beginning of year
|
|
$
|
109,066
|
|
|
$
|
115,709
|
|
|
$
|
148,639
|
|
Increases related to tax positions taken during the current year
|
|
2,464
|
|
|
8,843
|
|
|
12,260
|
|
Increases as a result of business combinations
|
|
286
|
|
|
1,032
|
|
|
43
|
|
Increases related to tax positions taken during prior years
|
|
147
|
|
|
10,305
|
|
|
9,226
|
|
Increases (decreases) related to foreign currency exchange rates
|
|
1,373
|
|
|
(2,253
|
)
|
|
2,449
|
|
Reductions for tax positions of prior years
|
|
(17,388
|
)
|
|
(23,415
|
)
|
|
(8,266
|
)
|
Reductions for settlements with tax authorities
|
|
(4,370
|
)
|
|
(1,054
|
)
|
|
(140
|
)
|
Reduction for rate change due to the 2017 Tax Act
|
|
—
|
|
|
—
|
|
|
(48,004
|
)
|
Lapses of statutes of limitations
|
|
(299
|
)
|
|
(101
|
)
|
|
(498
|
)
|
Gross unrecognized tax benefits, end of year
|
|
$
|
91,279
|
|
|
$
|
109,066
|
|
|
$
|
115,709
|
|
As of January 31, 2020, we had $91.3 million of unrecognized tax benefits, all of which, if recognized, would impact the effective income tax rate in future periods. We recorded $1.9 million, $0.7 million, and $1.5 million of tax expense for interest and penalties related to uncertain tax positions in our provision for income taxes for the years ended January 31, 2020, 2019, and 2018, respectively. Accrued liabilities for interest and penalties were $2.9 million and $4.6 million at January 31, 2020 and 2019, respectively. Interest and penalties (expense and/or benefit) are recorded as a component of the provision for income taxes in the consolidated financial statements.
Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate. In Israel, we are no longer subject to income tax examination for years prior to January 31, 2018. In the United Kingdom, with the exception of years which are currently under examination, we are no longer subject to income tax examination for years prior to January 31, 2017. In the U.S., our federal returns are no longer subject to income tax examination for years prior to January 31, 2017. However, to the extent we generated NOLs or tax credits in closed tax years, future use of the NOL or tax credit carry forward balance would be subject to examination within the relevant statute of limitations for the year in which utilized.
As of January 31, 2020, income tax returns are under examination in the following significant tax jurisdictions:
|
|
|
|
Jurisdiction
|
|
Tax Years
|
United Kingdom
|
|
December 31, 2006, January 31, 2008, January 31, 2018
|
India
|
|
March 31, 2007, March 31, 2008, March 31, 2010 - March 31, 2013, March 31, 2017
|
We regularly assess the adequacy of our provisions for income tax contingencies. As a result, we may adjust the reserves for unrecognized tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of expiration. We believe that it is reasonably possible that the total amount of unrecognized tax benefits at January 31, 2020 could decrease by approximately $1.3 million in the next twelve months as a result of settlement of certain tax audits or lapses of statutes of limitation. Such decreases may involve the payment of additional taxes, the adjustment of certain deferred taxes including the need for additional valuation allowances and the recognition of tax benefits.
|
|
12.
|
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 January 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2020
|
|
|
Fair Value Hierarchy Category
|
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
89
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
|
—
|
|
|
812
|
|
|
—
|
|
Contingent consideration receivable
|
|
—
|
|
|
—
|
|
|
738
|
|
Total assets
|
|
$
|
89
|
|
|
$
|
812
|
|
|
$
|
738
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
—
|
|
|
$
|
132
|
|
|
$
|
—
|
|
Interest rate swap agreement
|
|
—
|
|
|
13,501
|
|
|
—
|
|
Contingent consideration - business combinations
|
|
—
|
|
|
—
|
|
|
42,875
|
|
Option to acquire noncontrolling interests of consolidated subsidiaries
|
|
—
|
|
|
—
|
|
|
2,900
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
13,633
|
|
|
$
|
45,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2019
|
|
|
Fair Value Hierarchy Category
|
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
10,709
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
|
—
|
|
|
1,401
|
|
|
—
|
|
Interest rate swap agreement
|
|
—
|
|
|
2,072
|
|
|
—
|
|
Total assets
|
|
$
|
10,709
|
|
|
$
|
3,473
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
—
|
|
|
$
|
2,086
|
|
|
$
|
—
|
|
Interest rate swap agreements
|
|
—
|
|
|
4,028
|
|
|
—
|
|
Contingent consideration - business combinations
|
|
—
|
|
|
—
|
|
|
61,340
|
|
Option to acquire noncontrolling interests of consolidated subsidiaries
|
|
—
|
|
|
—
|
|
|
3,000
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
6,114
|
|
|
$
|
64,340
|
|
In January 2020, we completed the sale of an insignificant subsidiary in our Customer Engagement segment. In accordance with the terms of the sale agreement, 100% of the aggregate purchase price is contingent in nature based on a percentage of net sales of the former subsidiary’s products during the thirty-six month period following the transaction closing. We include the fair value of the contingent consideration receivable within prepaid expenses and other current assets and other assets on our consolidated balance sheet. The estimated fair value of this asset, which is measured using Level 3 inputs, as of January 31, 2020 was $0.7 million. Due to the timing of this transaction, there was no change to the estimated fair value of this receivable recorded in operating expenses for the year ended January 31, 2020.
The following table presents the changes in the estimated fair values of our liabilities for contingent consideration measured using significant unobservable inputs (Level 3) for the years ended January 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Fair value measurement, beginning of year
|
|
$
|
61,340
|
|
|
$
|
62,829
|
|
Contingent consideration liabilities recorded for business combinations
|
|
15,253
|
|
|
15,944
|
|
Changes in fair values, recorded in operating expenses
|
|
(531
|
)
|
|
(3,561
|
)
|
Payments of contingent consideration
|
|
(33,088
|
)
|
|
(13,600
|
)
|
Foreign currency translation and other
|
|
(99
|
)
|
|
(272
|
)
|
Fair value measurement, end of year
|
|
$
|
42,875
|
|
|
$
|
61,340
|
|
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 consolidated statements of operations within selling, general and administrative expenses.
During the year ended January 31, 2017, we acquired two majority owned subsidiaries for which we hold an option to acquire the noncontrolling interests. We account for the option as an in-substance investment in the noncontrolling common stock of each such subsidiary. We include the fair value of the option within other liabilities and do not recognize noncontrolling interests in these subsidiaries. The following table presents the change in the estimated fair value of this liability, which is measured using Level 3 inputs, for the years ended January 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Fair value measurement, beginning of year
|
|
$
|
3,000
|
|
|
$
|
2,950
|
|
Change in fair value, recorded in operating expenses
|
|
(100
|
)
|
|
50
|
|
Fair value measurement, end of year
|
|
$
|
2,900
|
|
|
$
|
3,000
|
|
There were no transfers between levels of the fair value measurement hierarchy during the years ended January 31, 2020 and 2019.
Fair Value Measurements
Money Market Funds - We value our money market funds using quoted active market prices for such funds.
Short-term Investments, Corporate Debt Securities, and Commercial Paper - The fair values of short-term investments, as well as corporate debt securities and commercial paper classified as cash equivalents, are estimated using observable market prices for identical securities that are traded in less-active markets, if available. When observable market prices for identical securities are not available, we value these short-term investments using non-binding market price quotes from brokers which we review for reasonableness using observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model.
Foreign Currency Forward Contracts - The estimated fair value of foreign currency forward contracts is based on quotes received from the counterparties thereto. These quotes are reviewed for reasonableness by discounting the future estimated cash flows under the contracts, considering the terms and maturities of the contracts and market foreign currency exchange rates using readily observable market prices for similar contracts.
Interest Rate Swap Agreements - The fair values of our interest rate swap agreements are based in part on data received from the counterparty, and represents the estimated amount we would receive or pay to settle the agreements, taking into consideration current and projected future interest rates as well as the creditworthiness of the parties, all of which can be validated through readily observable data from external sources.
Contingent Consideration Asset or Liability - Business Combinations and Divestitures - The fair value of the contingent consideration related to business combinations and divestitures is estimated using a probability-adjusted discounted cash flow model. These fair value measurements are based on significant inputs not observable in the market. The key internally developed assumptions used in these models are discount rates and the probabilities assigned to the milestones to be achieved. We remeasure the fair value of the contingent consideration at each reporting period, and any changes in fair value resulting from either the passage of time or events occurring after the acquisition date, such as changes in discount rates, or in the expectations of achieving the performance targets, are recorded within selling, general, and administrative expenses. Increases or decreases in discount rates would have inverse impacts on the related fair value measurements, while favorable or
unfavorable changes in expectations of achieving performance targets would result in corresponding increases or decreases in the related fair value measurements. We utilized discount rates ranging from 2.1% to 4.9% in our calculations of the estimated fair values of our contingent consideration liabilities as of January 31, 2020. We utilized discount rates ranging from 3.8% to 5.8% in our calculations of the estimated fair values of our contingent consideration liabilities as of January 31, 2019. We utilized discount rates ranging from 4.3% to 4.9% in our calculation of the estimated fair value of our contingent consideration asset as of January 31, 2020.
Option to Acquire Noncontrolling Interests of Consolidated Subsidiaries - The fair value of the option is determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management. This fair value measurement is based upon significant inputs not observable in the market. We remeasure the fair value of the option at each reporting period, and any changes in fair value are recorded within selling, general, and administrative expenses. We utilized discount rates of 9.0% and 12.5% in our calculation of the estimated fair value of the option as of January 31, 2020 and 2019, respectively.
Other Financial Instruments
The carrying amounts of accounts receivable, contract assets, accounts payable, and accrued liabilities and other current liabilities approximate fair value due to their short maturities.
The estimated fair values of our term loan and our revolving credit borrowings at January 31, 2020 were $417 million and $45 million, respectively. The estimated fair value of our term loan at January 31, 2019 was $412 million. We had no revolving credit borrowings at January 31, 2019. 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 January 31, 2020 and 2019 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.
The estimated fair values of our Notes were approximately $438 million and $400 million at January 31, 2020 and 2019, respectively. The estimated fair value of the Notes is determined based on quoted bid and ask prices in the over-the-counter market in which the Notes trade. We consider these inputs to be within Level 2 of the fair value hierarchy.
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, we also measure certain assets and liabilities at fair value on a nonrecurring basis. Our non-financial assets, including goodwill, intangible assets, operating lease right-of-use assets, and property, plant and equipment, are measured at fair value when there is an indication of impairment and the carrying amount exceeds the asset’s projected undiscounted cash flows. These assets are recorded at fair value only when an impairment charge is recognized. Further details regarding our regular impairment reviews appear in Note 1, “Summary of Significant Accounting Policies”.
As of January 31, 2020 and 2019, the carrying amount of our noncontrolling equity investments in privately-held companies without readily determinable fair values was $3.8 million. There were no observable price changes in our investments in privately-held companies and we did not recognize any impairments or other adjustments during the years ended January 31, 2020 and 2019.
13. DERIVATIVE FINANCIAL INSTRUMENTS
Our primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk, when deemed appropriate. We enter into these contracts in the normal course of business to mitigate risks and not for speculative purposes.
Foreign Currency Forward Contracts
Under our risk management strategy, we periodically use foreign currency forward contracts to manage our short-term exposures to fluctuations in operational cash flows resulting from changes in foreign currency exchange rates. These cash flow exposures result from portions of our forecasted operating expenses, primarily compensation and related expenses, which are transacted in currencies other than the U.S. dollar, most notably the Israeli shekel. We also periodically utilize foreign currency
forward contracts to manage exposures resulting from forecasted customer collections to be remitted in currencies other than the applicable functional currency, and exposures from cash, cash equivalents and short-term investments denominated in currencies other than the applicable functional currency. These foreign currency forward contracts generally have maturities of no longer than twelve months, although occasionally we will execute a contract that extends beyond twelve months, depending upon the nature of the underlying risk.
We held outstanding foreign currency forward contracts with notional amounts of $89.0 million and $123.0 million as of January 31, 2020 and 2019, respectively.
Interest Rate Swap Agreements
To partially mitigate risks associated with the variable interest rates on the term loan borrowings under the prior credit agreement, in February 2016, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution under which we paid interest at a fixed rate of 4.143% and received variable interest of three-month LIBOR (subject to a minimum of 0.75%), plus a spread of 2.75%, on a notional amount of $200.0 million (the “2016 Swap”). Although the prior credit agreement was terminated on June 29, 2017, the 2016 Swap agreement remained in effect until September 6, 2019, and served as an economic hedge to partially mitigate the risk of higher borrowing costs under our 2017 Credit Agreement resulting from increases in market interest rates. Settlements with the counterparty under the 2016 Swap occurred quarterly and the 2016 Swap matured on September 6, 2019.
Prior to June 29, 2017, the 2016 Swap was designated as a cash flow hedge for accounting purposes and as such, changes in its fair value were recognized in accumulated other comprehensive income (loss) in the consolidated balance sheet and were reclassified into the statement of operations within interest expense in the period in which the hedged transaction affected earnings. Hedge ineffectiveness, if any, was recognized currently in the consolidated statement of operations.
On June 29, 2017, concurrent with the execution of the 2017 Credit Agreement and termination of the prior credit agreement, the 2016 Swap was no longer designated as a cash flow hedge for accounting purposes and because occurrence of the specific forecasted variable cash flows which had been hedged by the 2016 Swap was no longer probable, the $0.9 million fair value of the 2016 Swap at that date was reclassified from accumulated other comprehensive income (loss) into the consolidated statement of operations as income within other income (expense), net. Ongoing changes in the fair value of the 2016 Swap were recognized within other income (expense), net in the consolidated statement of operations.
In April 2018, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution to partially mitigate risks associated with the variable interest rate on our 2017 Term Loan for periods following the termination of the 2016 Swap in September 2019, under which we pay interest at a fixed rate of 2.949% and receive variable interest of three-month LIBOR (subject to a minimum of 0.00%), on a notional amount of $200.0 million (the “2018 Swap”). The effective date of the 2018 Swap was September 6, 2019, and settlements with the counterparty will occur on a quarterly basis, beginning on November 1, 2019. The 2018 Swap will terminate on June 29, 2024.
During the operating term of the 2018 Swap, if we elect three-month LIBOR at the periodic interest rate reset dates for at least $200.0 million of our 2017 Term Loan, the annual interest rate on that amount of the 2017 Term Loan will be fixed at 4.949% (including the impact of our current 2.00% interest rate margin on Eurodollar loans) for the applicable interest rate period.
The 2018 Swap is designated as a cash flow hedge and as such, changes in its fair value are recognized in accumulated other comprehensive income (loss) in the consolidated balance sheet and are reclassified into the statement of operations within interest expense in the periods in which the hedged transactions affect earnings.
Fair Values of Derivative Financial Instruments
The fair values of our derivative financial instruments and their classifications in our consolidated balance sheets as of January 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
(in thousands)
|
|
Balance Sheet Classification
|
|
2020
|
|
2019
|
Derivative assets:
|
|
|
|
|
|
|
Foreign currency forward contracts:
|
|
|
|
|
|
|
Designated as cash flow hedges
|
|
Prepaid expenses and other current assets
|
|
$
|
710
|
|
|
$
|
738
|
|
Not designated as hedging instruments
|
|
Prepaid expenses and other current assets
|
|
102
|
|
|
663
|
|
Interest rate swap agreements:
|
|
|
|
|
|
|
Not designated as a hedging instrument
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
2,072
|
|
Total derivative assets
|
|
|
|
$
|
812
|
|
|
$
|
3,473
|
|
|
|
|
|
|
|
|
Derivative liabilities:
|
|
|
|
|
|
|
Foreign currency forward contracts:
|
|
|
|
|
|
|
Designated as cash flow hedges
|
|
Accrued expenses and other current liabilities
|
|
$
|
16
|
|
|
$
|
1,830
|
|
Not designated as hedging instruments
|
|
Accrued expenses and other current liabilities
|
|
116
|
|
|
256
|
|
Interest rate swap agreements:
|
|
|
|
|
|
|
Designated as a cash flow hedge
|
|
Accrued expenses and other current liabilities
|
|
2,060
|
|
|
122
|
|
Designated as a cash flow hedge
|
|
Other liabilities
|
|
11,441
|
|
|
3,906
|
|
Total derivative liabilities
|
|
|
|
$
|
13,633
|
|
|
$
|
6,114
|
|
Derivative Financial Instruments in Cash Flow Hedging Relationships
The effects of derivative financial instruments designated as cash flow hedges on accumulated other comprehensive loss (“AOCL”) and on the consolidated statement of operations for the years ended January 31, 2020, 2019, and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Net (losses) gains recognized in AOCL:
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
2,239
|
|
|
$
|
(981
|
)
|
|
$
|
3,312
|
|
Interest rate swap agreement
|
|
(10,265
|
)
|
|
(3,043
|
)
|
|
(341
|
)
|
|
|
$
|
(8,026
|
)
|
|
$
|
(4,024
|
)
|
|
$
|
2,971
|
|
Net (losses) gains reclassified from AOCL to the consolidated statements of operations:
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
453
|
|
|
$
|
(4,219
|
)
|
|
$
|
6,813
|
|
Interest rate swap agreement
|
|
(792
|
)
|
|
—
|
|
|
(254
|
)
|
|
|
$
|
(339
|
)
|
|
$
|
(4,219
|
)
|
|
$
|
6,559
|
|
For information regarding the line item locations of the net (losses) gains on derivative financial instruments reclassified out of AOCL into the consolidated statements of operations, see Note 9, “Stockholders’ Equity”.
There were no gains or losses from ineffectiveness of these cash flow hedges recorded for the year ended January 31, 2018. Effective with our February 1, 2018 adoption of ASU No. 2017-12, ineffectiveness of cash flow hedges is no longer recognized. All of the foreign currency forward contracts underlying the $0.6 million of net unrealized losses recorded in our accumulated other comprehensive loss at January 31, 2020 mature within twelve months, and therefore we expect all such losses to be reclassified into earnings within the next twelve months. Approximately $1.6 million of the $10.5 million of net unrealized losses related to our interest rate swap agreement recorded in our accumulated other comprehensive loss at January 31, 2020 settle within twelve months, and therefore we expect those losses to be reclassified into earnings within the next twelve months.
Derivative Financial Instruments Not Designated as Hedging Instruments
Gains (losses) recognized on derivative financial instruments not designated as hedging instruments in our consolidated statements of operations for the years ended January 31, 2020, 2019, and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification in Consolidated Statements of Operations
|
|
Year Ended January 31,
|
(in thousands)
|
|
|
2020
|
|
2019
|
|
2018
|
Foreign currency forward contracts
|
|
Other income (expense), net
|
|
$
|
647
|
|
|
$
|
1,891
|
|
|
$
|
(2,546
|
)
|
Interest rate swap agreements
|
|
Other income (expense), net
|
|
(48
|
)
|
|
620
|
|
|
$
|
2,529
|
|
|
|
|
|
$
|
599
|
|
|
$
|
2,511
|
|
|
$
|
(17
|
)
|
14. STOCK-BASED COMPENSATION AND OTHER BENEFIT PLANS
Stock-Based Compensation Plans
Plan Summaries
We issue stock-based incentive awards to eligible employees, directors and consultants, including restricted stock units (“RSUs”), performance stock units (“PSUs”), stock options (both incentive and non-qualified), and other awards, under the terms of our outstanding stock benefit plans (the “Plans” or “Stock Plans”) and/or forms of equity award agreements approved by our board of directors.
Awards are generally subject to multi-year vesting periods. We recognize compensation expense for awards on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods, reduced by estimated forfeitures. Upon issuance of restricted stock, exercise of stock options, or issuance of shares under the Plans, we generally issue new shares of common stock, but occasionally may issue treasury shares.
New Stock-Based Compensation Plan
On June 20, 2019, our stockholders approved the Verint Systems Inc. 2019 Long-Term Stock Incentive Plan (the “2019 Plan”). Upon approval of the 2019 Plan, additional awards are no longer permitted under our prior stock-based compensation plan (the “2017 Amended Plan”). Awards outstanding at June 20, 2019 under the 2017 Amended Plan or other previous stock-based compensation plans were not impacted by the approval of the 2019 Plan. Collectively, our stock-based compensation plans are referred to herein as the “Plans”.
The 2019 Plan authorizes our board of directors to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, other stock-based awards, and performance compensation awards. Subject to adjustment as provided in the 2019 Plan, up to an aggregate of (i) 9,475,000 shares of our common stock plus (ii) the number of shares of our common stock available for issuance under the 2017 Amended Plan as of June 20, 2019, plus (iii) the number of shares of our common stock that become available for issuance as a result of awards made under the 2017 Amended Plan or the 2019 Plan that are forfeited, cancelled, exchanged, or that terminate or expire, may be issued or transferred in connection with awards under the 2019 Plan. Each stock option or stock-settled stock appreciation right granted under the 2019 Plan will reduce the available plan capacity by one share and each other award will reduce the available plan capacity by 2.38 shares.
Stock-Based Compensation Expense
We recognized stock-based compensation expense in the following line items on the consolidated statements of operations for the years ended January 31, 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Component of income (loss) before (benefit) provision for income taxes:
|
|
|
|
|
|
|
Cost of revenue - product
|
|
$
|
2,014
|
|
|
$
|
1,309
|
|
|
$
|
1,561
|
|
Cost of revenue - service and support
|
|
6,170
|
|
|
4,426
|
|
|
6,904
|
|
Research and development, net
|
|
13,426
|
|
|
9,870
|
|
|
13,144
|
|
Selling, general and administrative
|
|
61,088
|
|
|
51,052
|
|
|
47,757
|
|
Total stock-based compensation expense
|
|
82,698
|
|
|
66,657
|
|
|
69,366
|
|
Income tax benefits related to stock-based compensation (before consideration of valuation allowances)
|
|
12,651
|
|
|
10,377
|
|
|
16,504
|
|
Total stock-based compensation, net of taxes
|
|
$
|
70,047
|
|
|
$
|
56,280
|
|
|
$
|
52,862
|
|
The following table summarizes stock-based compensation expense by type of award for the years ended January 31, 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Restricted stock units and restricted stock awards
|
|
$
|
65,080
|
|
|
$
|
57,639
|
|
|
$
|
57,188
|
|
Stock bonus program and bonus share program
|
|
17,543
|
|
|
8,943
|
|
|
12,108
|
|
Total equity-settled awards
|
|
82,623
|
|
|
66,582
|
|
|
69,296
|
|
Phantom stock units (cash-settled awards)
|
|
75
|
|
|
75
|
|
|
70
|
|
Total stock-based compensation expense
|
|
$
|
82,698
|
|
|
$
|
66,657
|
|
|
$
|
69,366
|
|
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.
Effective with our adoption of ASU No. 2016-09 on February 1, 2017, we recorded $2.4 million and $0.2 million of net excess tax benefits and a $0.5 million net excess tax deficiency resulting from our Stock Plans as a component of income tax expense for the years ended January 31, 2020, 2019 and 2018, respectively.
Restricted Stock Units and Performance Stock Units
We periodically award RSUs to our directors, officers, and other employees. The fair value of these awards is equivalent to the market value of our common stock on the grant date. RSUs are not shares of our common stock and do not have any of the rights or privileges thereof, including voting or dividend rights. On the applicable vesting date, the holder of an RSU becomes entitled to a share of our common stock. RSUs are subject to certain restrictions and forfeiture provisions prior to vesting.
We periodically award PSUs to executive officers and certain employees that vest upon the achievement of specified performance goals or market conditions. We separately recognize compensation expense for each tranche of a PSU award as if it were a separate award with its own vesting date. For certain PSUs, an accounting grant date may be established prior to the requisite service period.
Once a performance vesting condition has been defined and communicated, and the requisite service period has begun, our estimate of the fair value of PSUs requires an assessment of the probability that the specified performance criteria will be achieved, which we update at each reporting date and adjust our estimate of the fair value of the PSUs, if necessary. All compensation expense for PSUs with market conditions is recognized if the requisite service period is fulfilled, even if the market condition is not satisfied.
RSUs and PSUs that are expected to settle with cash payments upon vesting, if any, are reflected as liabilities on our consolidated balance sheets. Such RSUs and PSUs were insignificant at January 31, 2020, 2019, and 2018.
The following table (“Award Activity Table”) summarizes activity for RSUs, PSUs, and other stock awards that reduce available Plan capacity under the Plans for the years ended January 31, 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
|
|
2020
|
|
2019
|
|
2018
|
(in thousands, except grant date fair values)
|
|
Shares or Units
|
|
Weighted-Average Grant-Date Fair Value
|
|
Shares or Units
|
|
Weighted-Average Grant-Date Fair Value
|
|
Shares or Units
|
|
Weighted-Average Grant-Date Fair Value
|
Beginning balance
|
|
2,777
|
|
|
$
|
41.05
|
|
|
2,808
|
|
|
$
|
41.18
|
|
|
2,742
|
|
|
$
|
45.20
|
|
Granted
|
|
1,620
|
|
|
$
|
60.42
|
|
|
1,708
|
|
|
$
|
43.03
|
|
|
1,804
|
|
|
$
|
40.19
|
|
Released
|
|
(1,435
|
)
|
|
$
|
40.59
|
|
|
(1,481
|
)
|
|
$
|
43.67
|
|
|
(1,403
|
)
|
|
$
|
45.96
|
|
Forfeited
|
|
(226
|
)
|
|
$
|
45.57
|
|
|
(258
|
)
|
|
$
|
41.07
|
|
|
(335
|
)
|
|
$
|
48.92
|
|
Ending balance
|
|
2,736
|
|
|
$
|
52.53
|
|
|
2,777
|
|
|
$
|
41.05
|
|
|
2,808
|
|
|
$
|
41.18
|
|
With respect to our stock bonus program, activity presented in the table above only includes shares earned and released in consideration of the discount provided under that program. Consistent with the provisions of the Plans under which such shares are issued, other shares issued under the stock bonus program are not included in the table above because they do not reduce available plan capacity (since such shares are deemed to be purchased by the grantee at fair value in lieu of receiving an earned cash bonus). Activity presented in the table above includes all shares awarded and released under the bonus share program. Further details appear below under “Stock Bonus Program” and “Bonus Share Program”.
Our RSU awards may include a provision which allows the awards to be settled with cash payments upon vesting, rather than with delivery of common stock, at the discretion of our board of directors. As of January 31, 2020, for such awards that are outstanding, settlement with cash payments was not considered probable, and therefore these awards have been accounted for as equity-classified awards and are included in the table above.
The following table summarizes PSU activity in isolation under the Plans for the years ended January 31, 2020, 2019, and 2018 (these amounts are already included in the Award Activity Table above):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Beginning balance
|
|
512
|
|
|
506
|
|
|
438
|
|
Granted
|
|
291
|
|
|
228
|
|
|
204
|
|
Released
|
|
(245
|
)
|
|
(139
|
)
|
|
(50
|
)
|
Forfeited
|
|
(32
|
)
|
|
(83
|
)
|
|
(86
|
)
|
Ending balance
|
|
526
|
|
|
512
|
|
|
506
|
|
Excluding PSUs, we granted 1,329,000 RSUs during the year ended January 31, 2020.
As of January 31, 2020, there was approximately $83.3 million of total unrecognized compensation expense, net of estimated forfeitures, related to unvested restricted stock units, which is expected to be recognized over a weighted average period of 1.5 years.
Stock Options
We did not grant stock options during the years ended January 31, 2020, 2019, and 2018, and activity from stock options awarded in prior periods was not material during these years.
Phantom Stock Units
We have periodically issued phantom stock units to certain employees that settle, or are expected to settle, with cash payments upon vesting. Like equity-settled awards, phantom stock units are awarded with vesting conditions and are subject to certain forfeiture provisions prior to vesting.
Phantom stock unit activity for the years ended January 31, 2020, 2019, and 2018 was not significant.
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.
The following table summarizes activity under the stock bonus program during the years ended January 31, 2020, 2019, and 2018 in isolation. As noted above, shares issued in respect of the discount feature under the program reduce available plan capacity and are included in the Award Activity Table above. Other shares issued under the program do not reduce available plan capacity and are therefore excluded from the Award Activity Table above.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Shares in lieu of cash bonus - granted and released (not included in the Award Activity Table above)
|
|
97
|
|
|
19
|
|
|
21
|
|
Shares in respect of discount (included in the Award Activity Table above):
|
|
|
|
|
|
|
Granted
|
|
16
|
|
|
—
|
|
|
—
|
|
Released
|
|
13
|
|
|
—
|
|
|
—
|
|
Awards under the stock bonus program for the performance period ended January 31, 2020 are expected to be issued during the first half of the year ending January 31, 2021.
In March 2019, our board of directors approved up to 150,000 shares of common stock, and a discount of 15%, for awards under our stock bonus program for the performance period ended January 31, 2020. In August 2019, our board of directors changed this maximum number of shares to 200,000 based on strong enrollment and made a corresponding reduction of 50,000 shares in the number of shares available for issuance under our bonus share program for the performance period ended January 31, 2020.
In March 2020, our board of directors approved up to 200,000 shares of common stock, and a discount of 15%, for awards under our stock bonus program for the performance period ended January 31, 2021.
Bonus Share Program
Under our bonus share program, we may provide discretionary bonuses to employees or pay earned bonuses that are outside the stock bonus program in the form of shares of common stock. Unlike the stock bonus program, there is no enrollment for this program and no discount feature. 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. As noted above, shares issued under this program are included in the Award Activity Table above.
During the year ended January 31, 2018, approximately 293,000 shares of common stock were awarded and released under the bonus share program in respect of the performance period ended January 31, 2017. These shares are included in the Award Activity Table above.
During the year ended January 31, 2019, approximately 197,000 shares of common stock were awarded and released under the bonus share program in respect of the performance period ended January 31, 2018. These shares are included in the Award Activity Table above.
During the year ended January 31, 2020, approximately 59,000 shares of common stock were awarded and released under the bonus share program in respect of the performance period ended January 31, 2019.
For bonuses in respect of the year ended January 31, 2020, the board of directors has approved the use of up to 305,000 shares of common stock under this program, reduced by any shares used under the stock bonus program in respect of the performance period ended January 31, 2020. For example, assuming all 200,000 shares currently authorized for issuance under the stock bonus program for the performance period ended January 31, 2020 were issued, no more than 105,000 shares would be issued under the bonus share program for such performance period. Awards under the bonus share program for the performance period ended January 31, 2020 are expected to be issued during the first half of the year ending January 31, 2021.
For bonuses in respect of the year ending January 31, 2021, our board of directors has approved the use of up to 300,000 shares of common stock under this program, reduced by any shares used under the stock bonus program in respect of the same performance period.
The combined accrued liabilities for the stock bonus program and the bonus share program were $17.3 million and $9.3 million at January 31, 2020 and 2019, respectively.
Other Benefit Plans
401(k) Plan and Other Retirement Plans
We maintain a 401(k) Plan for our full-time employees in the United States. The plan allows eligible employees who attain the age of 21 beginning with the first of the month following their date of hire to elect to contribute up to 60% of their annual compensation, subject to the prescribed maximum amount. We match employee contributions at a rate of 50%, up to a maximum annual matched contribution of $2,000 per employee.
Employee contributions are always fully vested, while our matching contributions for each year vest on the last day of the calendar year provided the employee remains employed with us on that day.
Our matching contribution expenses for our 401(k) Plan were $3.0 million, $2.7 million, and $2.5 million for the years ended January 31, 2020, 2019, and 2018, respectively.
We provide retirement benefits for non-U.S. employees as required by local laws or to a greater extent as we deem appropriate through plans that function similar to 401(k) plans. Funding requirements for programs required by local laws are determined on an individual country and plan basis and are subject to local country practices and market circumstances.
Severance Pay
We are obligated to make severance payments for the benefit of certain employees of our foreign subsidiaries. Severance payments made to Israeli employees are considered significant compared to all other subsidiaries with severance payment arrangements. Under Israeli law, we are obligated to make severance payments to employees of our Israeli subsidiaries, subject to certain conditions. In most cases, our liability for these severance payments is fully provided for by regular deposits to funds administered by insurance providers and by an accrual for the amount of our liability which has not yet been deposited.
Severance expenses for our Israeli employees for the years ended January 31, 2020, 2019, and 2018 were $8.7 million, $13.3 million, and $7.1 million, respectively.
15. LEASES
We have entered into operating leases primarily for corporate offices, research and development facilities, datacenters, and automobiles. Our finance leases primarily relate to infrastructure equipment. Our leases have remaining lease terms of 1 year to 12 years, some of which may include options to extend the leases for up to 10 years, and some of which may include options to terminate the leases within 1 year. As of January 31, 2020, assets recorded under finance leases were $13.3 million and accumulated depreciation associated with finance leases was $0.7 million.
The components of lease expenses for the year ended January 31, 2020 were as follows:
|
|
|
|
|
|
(in thousands)
|
|
Year Ended
January 31, 2020
|
Operating lease expenses
|
|
$
|
29,898
|
|
Finance lease expenses:
|
|
|
Amortization of right-of-use assets
|
|
581
|
|
Interest on lease liabilities
|
|
226
|
|
Total finance lease expenses
|
|
807
|
|
Variable lease expenses
|
|
8,233
|
|
Short-term lease expenses
|
|
860
|
|
Sublease income
|
|
(908
|
)
|
Total lease expenses
|
|
$
|
38,890
|
|
Other information related to leases was as follows:
|
|
|
|
|
|
(dollars in thousands)
|
|
Year Ended
January 31, 2020
|
Supplemental cash flow information
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
|
$
|
27,599
|
|
Operating cash flows from finance leases
|
|
226
|
|
Financing cash flows from finance leases
|
|
2,522
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
Operating leases
|
|
$
|
22,472
|
|
Finance leases
|
|
6,405
|
|
Weighted average remaining lease terms
|
|
|
Operating leases
|
|
6 years
|
|
Finance leases
|
|
4 years
|
|
Weighted average discount rates
|
|
|
Operating leases
|
|
6.0
|
%
|
Finance leases
|
|
5.2
|
%
|
Maturities of lease liabilities as of January 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2020
|
(in thousands)
|
|
Operating Leases
|
|
Finance Leases
|
Year Ending January 31,
|
|
|
|
|
2021
|
|
$
|
28,675
|
|
|
$
|
3,195
|
|
2022
|
|
23,275
|
|
|
3,110
|
|
2023
|
|
20,014
|
|
|
2,474
|
|
2024
|
|
18,313
|
|
|
1,250
|
|
2025
|
|
16,405
|
|
|
776
|
|
Thereafter
|
|
27,524
|
|
|
—
|
|
Total future minimum lease payments
|
|
134,206
|
|
|
10,805
|
|
Less: imputed interest
|
|
(21,179
|
)
|
|
(888
|
)
|
Total
|
|
$
|
113,027
|
|
|
$
|
9,917
|
|
|
|
|
|
|
Reported as of January 31, 2020:
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
22,655
|
|
|
$
|
2,707
|
|
Operating lease liabilities
|
|
90,372
|
|
|
—
|
|
Other liabilities
|
|
—
|
|
|
7,210
|
|
Total
|
|
$
|
113,027
|
|
|
$
|
9,917
|
|
As of January 31, 2020, we have additional operating leases for office facilities that have not yet commenced with future lease obligations of $5.8 million. These operating leases will commence in 2020 with lease terms greater than 1 year to 6 years.
As previously disclosed in our January 31, 2019 Form 10-K and under the previous lease accounting standard, future minimum lease payments under non-cancelable operating leases as of January 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Operating
|
|
Capital
|
Years Ending January 31,
|
|
Leases
|
|
Leases
|
2020
|
|
$
|
22,769
|
|
|
$
|
1,343
|
|
2021
|
|
21,942
|
|
|
1,252
|
|
2022
|
|
19,157
|
|
|
1,130
|
|
2023
|
|
16,882
|
|
|
765
|
|
2024
|
|
15,152
|
|
|
107
|
|
Thereafter
|
|
33,477
|
|
|
—
|
|
Total
|
|
$
|
129,379
|
|
|
4,597
|
|
Less: amount representing interest and other charges
|
|
|
|
(315
|
)
|
Present value of minimum lease payments
|
|
|
|
$
|
4,282
|
|
16. COMMITMENTS AND CONTINGENCIES
Unconditional Purchase Obligations
In the ordinary course of business, we enter into certain unconditional purchase obligations, which are agreements to purchase goods or services that are enforceable, legally binding, and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on current needs and are typically fulfilled by our vendors within a relatively short time horizon. As of January 31, 2020, our unconditional purchase obligations totaled approximately $228.0 million.
Licenses and Royalties
We license certain technology and pay royalties under such licenses and other agreements entered into in connection with research and development activities.
As discussed in Note 1, “Summary of Significant Accounting Policies”, we receive non-refundable grants from the IIA that fund a portion of our research and development expenditures. The Israeli law under which the IIA grants are made limits our ability to manufacture products, or transfer technologies, developed using these grants outside of Israel. If we were to seek approval to manufacture products, or transfer technologies, developed using these grants outside of Israel, we could be subject to additional royalty requirements or be required to pay certain redemption fees. If we were to violate these restrictions, we could be required to refund any grants previously received, together with interest and penalties, and may be subject to criminal penalties.
Off-Balance Sheet Risk
In the normal course of business, we provide certain customers with financial performance guarantees, which are generally backed by standby letters of credit or surety bonds. In general, we would only be liable for the amounts of these guarantees in the event that our nonperformance permits termination of the related contract by our customer, which we believe is remote. At January 31, 2020, we had approximately $95.6 million of outstanding letters of credit and surety bonds relating primarily to these performance guarantees. As of January 31, 2020, we believe we were in compliance with our performance obligations under all contracts for which there is a financial performance guarantee, and the ultimate liability, if any, incurred in connection with these guarantees will not have a material adverse effect on our consolidated results of operations, financial position, or cash flows. Our historical non-compliance with our performance obligations has been insignificant.
Indemnifications
In the normal course of business, we provide indemnifications of varying scopes to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these
indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.
To the extent permitted under Delaware law or other applicable law, we indemnify our directors, officers, employees, and agents against claims they may become subject to by virtue of serving in such capacities for us. We also have contractual indemnification agreements with our directors, officers, and certain senior executives. The maximum amount of future payments we could be required to make under these indemnification arrangements and agreements is potentially unlimited; however, we have insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. We are not able to estimate the fair value of these indemnification arrangements and agreements in excess of applicable insurance coverage, if any.
Legal Proceedings
In March 2009, one of our former employees, Ms. Orit Deutsch, commenced legal actions in Israel against our primary Israeli subsidiary, Verint Systems Limited (“VSL”) (Case Number 4186/09) and against our affiliate CTI (Case Number 1335/09). Also in March 2009, a former employee of Comverse Limited (CTI’s primary Israeli subsidiary at the time), Ms. Roni Katriel, commenced similar legal actions in Israel against Comverse Limited (Case Number 3444/09). In these actions, the plaintiffs generally sought to certify class action suits against the defendants on behalf of current and former employees of VSL and Comverse Limited who had been granted stock options in Verint and/or CTI and who were allegedly damaged as a result of a suspension on option exercises during an extended filing delay period that is discussed in our and CTI’s historical public filings. On June 7, 2012, the Tel Aviv District Court, where the cases had been filed or transferred, allowed the plaintiffs to consolidate and amend their complaints against the three defendants: VSL, CTI, and Comverse Limited.
On October 31, 2012, CTI distributed of all of the outstanding shares of common stock of Comverse, Inc., its principal operating subsidiary and parent company of Comverse Limited, to CTI’s shareholders (the “Comverse Share Distribution”). In the period leading up to the Comverse Share Distribution, CTI either sold or transferred substantially all of its business operations and assets (other than its equity ownership interests in Verint and in its then-subsidiary, Comverse, Inc.) to Comverse, Inc. or to unaffiliated third parties. As the result of these transactions, Comverse, Inc. became an independent company and ceased to be affiliated with CTI, and CTI ceased to have any material assets other than its equity interests in Verint. Prior to the completion of the Comverse Share Distribution, the plaintiffs sought to compel CTI to set aside up to $150.0 million in assets to secure any future judgment, but the District Court did not rule on this motion. In February 2017, Mavenir Inc. became successor-in-interest to Comverse, Inc.
On February 4, 2013, Verint acquired the remaining CTI shell company in a merger transaction (the “CTI Merger”). As a result of the CTI Merger, Verint assumed certain rights and liabilities of CTI, including any liability of CTI arising out of the foregoing legal actions. However, under the terms of a Distribution Agreement entered into in connection with the Comverse Share Distribution, we, as successor to CTI, are entitled to indemnification from Comverse, Inc. (now Mavenir) for any losses we may suffer in our capacity as successor to CTI related to the foregoing legal actions.
Following an unsuccessful mediation process, on August 28, 2016, the District Court (i) denied the plaintiffs’ motion to certify the suit as a class action with respect to all claims relating to Verint stock options and (ii) approved the plaintiffs’ motion to certify the suit as a class action with respect to claims of current or former employees of Comverse Limited (now part of Mavenir) or of VSL who held unexercised CTI stock options at the time CTI suspended option exercises. The court also ruled that the merits of the case would be evaluated under New York law.
As a result of this ruling (which excluded claims related to Verint stock options from the case), one of the original plaintiffs in the case, Ms. Deutsch, was replaced by a new representative plaintiff, Mr. David Vaaknin. CTI appealed portions of the District Court’s ruling to the Israeli Supreme Court. On August 8, 2017, the Israeli Supreme Court partially allowed CTI’s appeal and ordered the case to be returned to the District Court to determine whether a cause of action exists under New York law based on the parties’ expert opinions.
Following a second unsuccessful round of mediation in mid to late 2018, the proceedings resumed. The plaintiffs have filed a motion to amend the class certification motion and CTI has filed a corresponding motion to dismiss and a response. These motions are now before the court following a third unsuccessful round of mediation in mid-2019.
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.
17. SEGMENT, GEOGRAPHIC, AND SIGNIFICANT CUSTOMER INFORMATION
Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the enterprise’s CODM, or decision making group, in deciding how to allocate resources and in assessing performance. Our Chief Executive Officer is our CODM.
We report our results in two operating segments—Customer Engagement and Cyber Intelligence. Our Customer Engagement solutions help customer-centric organizations optimize customer engagement, increase customer loyalty, and maximize revenue opportunities, while generating operational efficiencies, reducing cost, and mitigating risk. Our Cyber Intelligence solutions are used for a wide range of applications, including predictive intelligence, advanced and complex investigations, security threat analysis, and electronic data and physical assets protection, as well as for generating legal evidence and preventing criminal activity and terrorism.
We measure the performance of our operating segments primarily based on segment revenue and segment contribution.
Segment revenue includes adjustments associated with revenue of acquired companies which are not recognizable within GAAP revenue. These adjustments primarily relate to the acquisition-date excess of the historical carrying value over the fair value of acquired companies’ future maintenance and service performance obligations. As the obligations are satisfied, we report our segment revenue using the historical carrying values of these obligations, which we believe better reflects our ongoing maintenance and service revenue streams, whereas GAAP revenue is reported using the obligations’ acquisition-date fair values. Segment revenue adjustments can also result from aligning an acquired company’s historical revenue recognition policies to our policies.
Segment contribution includes segment revenue and expenses incurred directly by the segment, including material costs, service costs, research and development, selling, marketing, and certain administrative expenses. When determining segment contribution, we do not allocate certain operating expenses which are provided by shared resources or are otherwise generally not controlled by segment management. These expenses are reported as “Shared support expenses” in our table of segment operating results, the majority of which are expenses for administrative support functions, such as information technology, human resources, finance, legal, and other general corporate support, and for occupancy expenses. These unallocated expenses also include procurement, manufacturing support, and logistics expenses. We share resources across our segments for efficiency and to avoid duplicative costs.
In addition, segment contribution does not include amortization of acquired intangible assets, stock-based compensation, and other expenses that either can vary significantly in amount and frequency, are based upon subjective assumptions, or in certain cases are unplanned for or difficult to forecast, such as restructuring expenses and business combination transaction and integration expenses, all of which are not considered when evaluating segment performance.
Revenue from transactions between our operating segments is not material.
Operating results by segment for the years ended January 31, 2020, 2019, and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Revenue:
|
|
|
|
|
|
|
|
|
Customer Engagement:
|
|
|
|
|
|
|
|
|
Segment revenue
|
|
$
|
873,200
|
|
|
$
|
811,346
|
|
|
$
|
755,038
|
|
Revenue adjustments
|
|
(26,675
|
)
|
|
(15,059
|
)
|
|
(14,971
|
)
|
|
|
846,525
|
|
|
796,287
|
|
|
740,067
|
|
Cyber Intelligence:
|
|
|
|
|
|
|
|
|
Segment revenue
|
|
462,817
|
|
|
433,753
|
|
|
395,420
|
|
Revenue adjustments
|
|
(5,708
|
)
|
|
(293
|
)
|
|
(258
|
)
|
|
|
457,109
|
|
|
433,460
|
|
|
395,162
|
|
Total revenue
|
|
$
|
1,303,634
|
|
|
$
|
1,229,747
|
|
|
$
|
1,135,229
|
|
|
|
|
|
|
|
|
Segment contribution:
|
|
|
|
|
|
|
|
|
Customer Engagement
|
|
$
|
338,098
|
|
|
$
|
316,776
|
|
|
$
|
286,236
|
|
Cyber Intelligence
|
|
130,519
|
|
|
114,012
|
|
|
94,585
|
|
Total segment contribution
|
|
468,617
|
|
|
430,788
|
|
|
380,821
|
|
|
|
|
|
|
|
|
Reconciliation of segment contribution to operating income:
|
|
|
|
|
|
|
|
|
Revenue adjustments
|
|
32,383
|
|
|
15,352
|
|
|
15,229
|
|
Shared support expenses
|
|
177,308
|
|
|
163,893
|
|
|
154,673
|
|
Amortization of acquired intangible assets
|
|
55,442
|
|
|
56,413
|
|
|
72,425
|
|
Stock-based compensation
|
|
82,698
|
|
|
66,657
|
|
|
69,366
|
|
Acquisition, integration, restructuring, and other unallocated expenses
|
|
32,930
|
|
|
14,238
|
|
|
20,498
|
|
Total reconciling items, net
|
|
380,761
|
|
|
316,553
|
|
|
332,191
|
|
Operating income
|
|
$
|
87,856
|
|
|
$
|
114,235
|
|
|
$
|
48,630
|
|
With the exception of goodwill and acquired intangible assets, we do not identify or allocate our assets by operating segment. Consequently, it is not practical to present assets by operating segment. There were no material changes in the allocations of goodwill and acquired intangible assets by operating segment during the years ended January 31, 2020, 2019, and 2018. Further details regarding the allocations of goodwill and acquired intangible assets by operating segment appear in Note 6, “Intangible Assets and Goodwill”.
Geographic Information
Revenue by major geographic region is based upon the geographic location of the customers who purchase our products and services. The geographic locations of distributors, resellers, and systems integrators who purchase and resell our products may be different from the geographic locations of end customers.
Revenue in the Americas includes the United States, Canada, Mexico, Brazil, and other countries in the Americas. Revenue in Europe, the Middle East and Africa (“EMEA”) includes the United Kingdom, Germany, Israel, and other countries in EMEA. Revenue in the Asia-Pacific (“APAC”) region includes Australia, India, Singapore, and other Asia-Pacific countries.
The information below summarizes revenue from unaffiliated customers by geographic area for the years ended January 31, 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Americas:
|
|
|
|
|
|
|
United States
|
|
$
|
590,602
|
|
|
$
|
555,365
|
|
|
$
|
445,406
|
|
Other
|
|
93,302
|
|
|
103,158
|
|
|
150,993
|
|
Total Americas
|
|
683,904
|
|
|
658,523
|
|
|
596,399
|
|
EMEA
|
|
374,721
|
|
|
321,723
|
|
|
354,495
|
|
APAC
|
|
245,009
|
|
|
249,501
|
|
|
184,335
|
|
Total revenue
|
|
$
|
1,303,634
|
|
|
$
|
1,229,747
|
|
|
$
|
1,135,229
|
|
Our long-lived assets primarily consist of net property and equipment, operating lease right-of-use assets, goodwill and other intangible assets, and deferred income taxes. We believe that our tangible long-lived assets, which consist of our net property and equipment, are exposed to greater geographic area risks and uncertainties than intangible assets and long-term cost deferrals, because these tangible assets are difficult to move and are relatively illiquid.
Property and equipment, net by geographic area consisted of the following as of January 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
(in thousands)
|
|
2020
|
|
2019
|
United States
|
|
$
|
61,096
|
|
|
$
|
51,006
|
|
Israel
|
|
33,316
|
|
|
30,310
|
|
Other countries
|
|
21,699
|
|
|
18,818
|
|
Total property and equipment, net
|
|
$
|
116,111
|
|
|
$
|
100,134
|
|
Significant Customers
No single customer accounted for more than 10% of our revenue during the years ended January 31, 2020, 2019, and 2018.
18. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized condensed quarterly financial information for the years ended January 31, 2020 and 2019 appears in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30,
|
|
July 31,
|
|
October 31,
|
|
January 31,
|
(in thousands, except per share data)
|
|
2019
|
|
2019
|
|
2019
|
|
2020
|
Revenue
|
|
$
|
315,259
|
|
|
$
|
324,305
|
|
|
$
|
324,867
|
|
|
$
|
339,203
|
|
Gross profit
|
|
$
|
201,071
|
|
|
$
|
207,864
|
|
|
$
|
211,595
|
|
|
$
|
219,338
|
|
Income before provision for income taxes
|
|
$
|
5,170
|
|
|
$
|
7,764
|
|
|
$
|
22,201
|
|
|
$
|
18,168
|
|
Net income
|
|
$
|
3,761
|
|
|
$
|
12,271
|
|
|
$
|
12,983
|
|
|
$
|
6,668
|
|
Net income attributable to Verint Systems Inc.
|
|
$
|
1,576
|
|
|
$
|
10,558
|
|
|
$
|
11,681
|
|
|
$
|
4,869
|
|
|
|
|
|
|
|
|
|
|
Net income per common share attributable to Verint Systems Inc.
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
0.16
|
|
|
$
|
0.17
|
|
|
$
|
0.07
|
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
0.16
|
|
|
$
|
0.17
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30,
|
|
July 31,
|
|
October 31,
|
|
January 31,
|
(in thousands, except per share data)
|
|
2018
|
|
2018
|
|
2018
|
|
2019
|
Revenue
|
|
$
|
289,207
|
|
|
$
|
306,327
|
|
|
$
|
303,983
|
|
|
$
|
330,230
|
|
Gross profit
|
|
$
|
175,115
|
|
|
$
|
193,020
|
|
|
$
|
192,744
|
|
|
$
|
219,655
|
|
(Loss) income before provision (benefit) for income taxes
|
|
$
|
(951
|
)
|
|
$
|
19,202
|
|
|
$
|
25,814
|
|
|
$
|
33,697
|
|
Net (loss) income
|
|
$
|
(1,225
|
)
|
|
$
|
22,924
|
|
|
$
|
20,213
|
|
|
$
|
28,308
|
|
Net (loss) income attributable to Verint Systems Inc.
|
|
$
|
(2,215
|
)
|
|
$
|
21,980
|
|
|
$
|
18,920
|
|
|
$
|
27,306
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share attributable to Verint Systems Inc.
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03
|
)
|
|
$
|
0.34
|
|
|
$
|
0.29
|
|
|
$
|
0.42
|
|
Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
0.33
|
|
|
$
|
0.29
|
|
|
$
|
0.41
|
|
Net income (loss) per common share attributable to Verint Systems Inc. is computed independently for each quarterly period and for the year. Therefore, the sum of quarterly net income (loss) per common share amounts may not equal the amounts reported for the years.
The quarterly operating results for the years ended January 31, 2020 and 2019 did not include any material unusual or infrequently occurring items.
As is typical for many software and technology companies, our business is subject to seasonal and cyclical factors. In most years, our revenue and operating income are typically highest in the fourth quarter and lowest in the first quarter (prior to the impact of unusual or nonrecurring items). Moreover, revenue and operating income in the first quarter of a new year may be lower than in the fourth quarter of the preceding year, in some years, potentially by a significant margin. In addition, we generally receive a higher volume of orders in the last month of a quarter, with orders concentrated in the later part of that month. We believe that these seasonal and cyclical factors primarily reflects customer spending patterns and budget cycles, as well as the impact of compensation incentive plans for our sales personnel. While seasonal and cyclical factors such as these are common in the software and technology industry, this pattern should not be considered a reliable indicator of our future revenue or financial performance. Many other factors, including general economic conditions, also have an impact on our business and financial results. See “Risk Factors” under Item 1A of this report for a more detailed discussion of factors which may affect our business and financial results.
19. SUBSEQUENT EVENTS
During the fourth quarter ended January 31, 2020, concerns related to the spread of COVID-19 began to create global business disruptions as well as disruptions in our operations and to create potential negative impacts on our revenues and other financial results. COVID-19 was declared a pandemic by the World Health Organization on March 11, 2020. The extent to which COVID-19 will impact our financial condition or results of operations is currently uncertain and depends on factors including the impact on our customers, partners, and vendors and on the operation of the global markets in general. Because an increasing portion of our business is based on a subscription model, the effect of COVID-19 on our results of operations may also not be fully reflected for some time.
We are currently conducting business with substantial modifications to employee travel, employee work locations, virtualization or cancellation of customer and employee events, and remote sales, implementation, and support activities, among other modifications. These decisions may delay or reduce sales and harm productivity and collaboration. We have observed other companies and governments making similar alteration to their normal business operations, including restrictions imposed by our customers on our ability to access their sites for implementations and support, and in general, the markets are experiencing a significant level of uncertainty at the current time. The pandemic could have an adverse impact on demand for our customers’ products and services, which in turn, could negatively impact the willingness of our customers to enter into or renew contracts with us. The pandemic has impacted our ability to complete certain implementations, negatively impacting our ability to recognize revenue, and could also negatively impact the payment of accounts receivable and collections. We may take further actions that alter our business operations as the situation evolves. As a result, the ultimate impact of the COVID-19 pandemic and the effects of the operational alterations we have made in response on our business, financial condition, liquidity, and financial results cannot be predicted at this time.
Subsequent to the year ended January 31, 2020, we increased the borrowings under our 2017 Revolving Credit Facility to $200.0 million. See Note 7, “Long-Term Debt”, for additional information regarding our revolving credit facility.