UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2015
Commission File No. 001-34807
Verint Systems Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or
Organization)
330 South Service Road, Melville, New York
(Address of Principal Executive Offices)
11-3200514
(I.R.S. Employer Identification No.)
11747
(Zip Code)
Registrant's telephone number, including area code: (631) 962-9600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $.001 par value per share
Name of each exchange
on which registered
The NASDAQ Stock Market, LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of common stock held by non-affiliates of the registrant, based on the closing price for the
registrant’s common stock on the NASDAQ Global Select Market on the last business day of the registrant’s most recently
completed second fiscal quarter (July 31, 2014) was approximately $2,832,767,000.
There were 60,904,912 shares of the registrant’s common stock outstanding on March 13, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth herein, is incorporated herein by reference from
the registrant's definitive proxy statement relating to the Annual Meeting of Stockholders to be held in 2015, which definitive
proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to
which this report relates.
Table of Contents
Verint Systems Inc. and Subsidiaries
Index to Form 10-K
For the Year Ended January 31, 2015
Cautionary Note on Forward-Looking Statements
PART I
Item1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
Signatures
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Cautionary Note on Forward-Looking Statements
This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, the provisions of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements
include financial projections, statements of plans and objectives for future operations, statements of future economic
performance, and statements of assumptions relating thereto. Forward-looking statements may appear throughout this report,
including without limitation, Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and are often identified by future or conditional words such as "will", "plans", "expects", "intends", "believes",
"seeks", "estimates", or "anticipates", or by variations of such words or by similar expressions. There can be no assurances that
forward-looking statements will be achieved. By their very nature, forward-looking statements involve known and unknown
risks, uncertainties, assumptions, and other important factors that could cause our actual results or conditions to differ
materially from those expressed or implied by such forward-looking statements. Important risks, uncertainties, assumptions,
and other factors that could cause our actual results or conditions to differ materially from our forward-looking statements
include, among others:
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uncertainties regarding the impact of general economic conditions in the United States and abroad, particularly in
information technology spending and government budgets, on our business;
risks associated with our ability to keep pace with technological changes, new customer challenges, and evolving
industry standards in our product offerings, adapt to changing market potential from area to area within our markets
and successfully develop, launch, and drive demand for new, innovative, high-quality products that meet or exceed
customer needs;
risks due to aggressive competition in all of our markets, including with respect to maintaining margins and sufficient
levels of investment in our business;
risks created by the continued consolidation of our competitors or the introduction of large competitors in our markets
with greater resources than we have;
risks associated with our ability to successfully compete for, consummate, and implement mergers and acquisitions,
including risks associated with valuations, capital constraints, costs and expenses, maintaining profitability levels,
expansion into new areas of growth, management distraction, post-acquisition integration activities, and potential asset
impairments;
risks relating to our ability to effectively and efficiently enhance our existing operations and execute on our growth
strategy, including managing investments in our business and operations and enhancing and securing our internal and
external operations;
risks associated with our ability to effectively and efficiently allocate limited financial and human resources to
business, development, strategic, or other opportunities that may not come to fruition or produce satisfactory returns;
risks that we may be unable to establish and maintain relationships with key resellers, partners, and systems
integrators;
risks associated with the mishandling or perceived mishandling of sensitive or confidential information, security
lapses, or with information technology system failures or disruptions;
risks associated with our significant international operations, including, among others, in Israel, Europe, and Asia,
exposure to regions subject to political or economic instability, and fluctuations in foreign exchange rates;
risks associated with a significant amount of our business coming from domestic and foreign government customers,
including the ability to maintain security clearances for certain projects;
risks associated with complex and changing local and foreign regulatory environments in the jurisdictions in which we
operate;
risks associated with our ability to retain and recruit qualified personnel in regions in which we operate, especially in
new markets and growth areas we may enter;
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challenges associated with selling sophisticated solutions, long sales cycles, and emphasis on larger transactions,
including in assisting customers in realizing the benefits of our solutions and in accurately forecasting revenue and
expenses and in maintaining profitability;
risks that our intellectual property rights may not be adequate to protect our business or assets or that others may make
claims on our intellectual property or claim infringement on their intellectual property rights;
risks that our products may contain defects or may be vulnerable to cyber-attacks, which could expose us to
substantial liability;
risks associated with our reliance on third-party suppliers, partners, or original equipment manufacturers ("OEMs") for
certain components, products, or services, including companies that may compete with us or work with our
competitors;
risks that our customers or partners delay or cancel orders or are unable to honor contractual commitments due to
liquidity issues, challenges in their business, or otherwise;
risks that we may experience liquidity or working capital issues and related risks that financing sources may be
unavailable to us on reasonable terms or at all;
risks associated with significant leverage resulting from our current debt position, including with respect to liquidity
considerations, covenant limitations and compliance, fluctuations in interest rates, dilution considerations (with
respect to our convertible notes), and our ability to maintain our credit ratings;
risks arising as a result of contingent or other obligations or liabilities assumed in our acquisition of our former parent
company, Comverse Technology, Inc. (“CTI”), or associated with formerly being consolidated with, and part of a
consolidated tax group with, CTI, or as a result of CTI's former subsidiary, Comverse, Inc. ("Comverse"), being
unwilling or unable to provide us with certain indemnities or transition services to which we are entitled;
risks relating to the adequacy of our existing infrastructure, systems, processes, policies, procedures, and personnel
and our ability to successfully implement and maintain adequate systems and internal controls for our current and
future operations and reporting needs, including related risks of financial statement omissions, misstatements,
restatements, or filing delays; and
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risks associated with changes in our tax position.
These risks, uncertainties, assumptions, and challenges, as well as other factors, are discussed in greater detail in "Risk Factors"
under Item 1A of this report. You are cautioned not to place undue reliance on forward-looking statements, which reflect our
management’s view only as of the date of this report. We make no commitment to revise or update any forward-looking
statements in order to reflect events or circumstances after the date any such statement is made, except as otherwise required
under the federal securities laws. If we were in any particular instance to update or correct a forward-looking statement,
investors and others should not conclude that we would make additional updates or corrections thereafter except as otherwise
required under the federal securities laws.
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PART I
Table of Contents
Item 1. Business
Our Company
Verint® Systems Inc. (together with its consolidated subsidiaries, “Verint”, the “Company”, “we”, “us”, and “our”, unless the
context indicates otherwise) is a global leader in Actionable Intelligence® solutions.
Actionable Intelligence is a necessity in a dynamic world of massive information growth because it empowers organizations
with crucial insights and enables decision makers to anticipate, respond, and take action. With Verint solutions and value-
added services, organizations of all sizes and across many industries can make more timely and effective decisions. Today,
more than 10,000 organizations in over 180 countries, including over 80 percent of the Fortune 100, use Verint solutions to
improve enterprise performance and make the world a safer place. Verint’s vision is to create A Smarter World with Actionable
Intelligence®.
Our Actionable Intelligence solutions help organizations address three important challenges: Customer Engagement
Optimization; Security Intelligence; and Fraud, Risk and Compliance. We help our customers capture large amounts of
information from numerous data types and sources, use analytics to glean insights from the information, and leverage the
resulting Actionable Intelligence to help achieve their customer engagement, enhanced security, and risk mitigation goals.
We have established leadership positions in our respective markets by developing highly-scalable, enterprise-class solutions
with advanced, integrated analytics for both unstructured and structured information. Our innovative solutions are developed
by a large research and development (“R&D”) team comprised of more than 1,500 professionals and backed by more than 700
patents and patent applications worldwide. To help our customers maximize the benefits of our technology over the solution
lifecycle and provide a high degree of flexibility, we offer a broad range of services-such as strategic consulting,
implementation services, training, maintenance, and 24 x 7 support, as well as a broad range of deployment models, including
on premises, hosted, managed services, and software as a service (“SaaS”).
Headquartered in Melville, New York, we support our customers around the globe directly and with an extensive network of
selling and support partners.
Company Background
We were incorporated in Delaware in February 1994, and in 2014, celebrated our 20th anniversary. Our initial public offering
(“IPO”) took place in May 2002. Over the last decade, we have grown our revenue every year and expanded our portfolio of
Actionable Intelligence solutions through a combination of organic innovation and acquisitions.
We have three operating segments: Enterprise Intelligence Solutions™ (“Enterprise Intelligence”), Communications and Cyber
Intelligence Solutions™ (“Communications Intelligence”), and Video and Situation Intelligence Solutions™ (“Video
Intelligence”), each of which is described in greater detail below and in “Management's Discussion and Analysis of Financial
Condition and Results of Operations” under Item 7 of this report. See also Note 18, “Segment, Geographic, and Significant
Customer Information” to our consolidated financial statements included under Item 8 of this report for additional information
and financial data about each of our operating segments and geographic regions. Our acquisition of KANA Software Inc.
(together with its parent company and subsidiaries, “KANA”) in February 2014 for net cash consideration of $516.6 million is
described in greater detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Overview—Notable Developments During the Year Ended January 31, 2015” included under Item 7 of this report and our
acquisitions of CTI and KANA are both described in greater detail in Note 4, “Business Combinations” to our consolidated
financial statements included under Item 8 of this report.
Through our website at www.verint.com, we make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-
Q and Current Reports on Form 8-K, as well as amendments to those reports, filed or furnished by us pursuant to Section 13(a)
or Section 15(d) of the Exchange Act, free of charge, as soon as reasonably practicable after we file such materials with, or
furnish such materials to, the Securities and Exchange Commission (“SEC”). Our website address set forth above is not
intended to be an active link and information on our website is not incorporated in, and should not be construed to be a part of,
this report.
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Our Market—Actionable Intelligence
Actionable Intelligence is a necessity in a dynamic world of massive information growth because it empowers organizations
with crucial insights and enables decision makers to anticipate, respond, and take action. Customers are now more aware of the
value they can create by using insights gleaned from large data sets. The amount and types of structured and unstructured data
available to customers is growing rapidly and presents new and increasing challenges and complexities. At the same time,
organizations that are able to generate Actionable Intelligence from big data are better positioned to create value and achieve
their strategic objectives.
Verint has been focused on Actionable Intelligence for more than a decade. Our solutions address three areas of the market:
• Customer Engagement Optimization—solutions that help organizations enrich customer interactions, improve business
processes, and optimize their workforces in order to enhance loyalty, increase revenue, mitigate risk, and manage
operational costs.
•
Security Intelligence—solutions that help organizations prevent, detect, neutralize, and investigate crime, terror, and cyber
threats, as well as protect people and property.
• Fraud, Risk and Compliance—solutions that help organizations prevent loss; comply with regulations; investigate cyber,
retail, and financial crime; and ensure continuity of business and protect private information.
To address the Actionable Intelligence market, over the last decade, we have spent more than $1.0 billion in R&D, creating the
foundation for Verint’s advanced Actionable Intelligence platform. We use our Actionable Intelligence platform internally to
efficiently develop innovative, highly-scalable, enterprise-class analytical solutions for the markets we serve. We define our
platform as having the following four components:
• Data Capture—Verint’s Actionable Intelligence platform enables the capture of a wide range of data, including both
structured and unstructured data such as operational, transactional, network, and web data. It is designed to support big
data applications which depend on the ability to capture, store, and manage very large data sets from multiple data
sources.
• Data Processing—Verint’s Actionable Intelligence platform facilitates the process of taking structured and
unstructured data from multiples sources and cleanses, fuses, and prepares the data for analysis. This data processing
stage is particularly important in applications that require data capture and fusion from multiple sources, different
systems, and numerous environments.
• Data Analysis—Verint’s Actionable Intelligence platform enables the use of a wide range of analytical engines for
data analytics, including classification, correlation, anomaly detection, identity extraction, behavioral analysis, and
predictive analytics. Big data analysis is a crucial step in identifying critical insights that otherwise might not be
intuitive.
• Data Visualization—Verint’s Actionable Intelligence platform facilitates the presentation of crucial insights from the
data to decision makers and the provision of workflow, collaboration, and case management capabilities so they can
act appropriately. The platform supports many use cases, and the type of data visualization used for delivering
actionable insights to users can be optimized based on the specific user environment.
Customer Engagement Optimization
We are a leading provider of Customer Engagement Optimization software and services that help organizations transform
customer engagements to drive better business outcomes by enhancing loyalty, increasing revenue, mitigating risk, and
managing operational costs. Our Customer Engagement Optimization solutions provide our customers with Actionable
Intelligence to enrich customer interactions, improve business processes, and optimize the workforce in order to achieve
important strategic objectives. These solutions are implemented in industries that have significant customer service operations,
such as insurance, banking and brokerage, telecommunications, media, retail, public services, and hospitality.
Historically, as organizations have looked to engage with their customers more effectively and address evolving
communication channels and changing expectations, they have had to purchase multiple point solutions from different vendors,
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creating integration challenges. Even if such point solutions were able to be integrated, we believe they often do not work
together optimally or in a unified manner. As a result, we believe that organizations can benefit from deploying a
comprehensive Customer Engagement Optimization solution that includes customer analytics, engagement management, and
enterprise workforce optimization capabilities, all from a single provider. As organizations take a more strategic approach to
customer sales and service, they will be better positioned to gain a competitive advantage, build more meaningful customer and
employee engagement, reduce operating costs, and increase revenue and customer loyalty.
We believe the key trends driving demand for Customer Engagement Optimization solutions include:
• Evolving Customer Expectations. Customers expect a more personalized and consistent experience across service
channels. The manner in which consumers obtain customer service has evolved from traditional call centers and in-store
visits, to multichannel customer engagement centers that include web self-service and digital communications, such as
email, chat, and social media. Today, consumers select service channels based on a number of factors, including which
channels are available, their experiences with those channels, personal preference, and the type of service issue at hand.
Often they use multiple channels for the same service-related issue, initially starting with a digital channel and ending with
the call center or vice versa. Consumer expectations are changing rapidly as organizations provide them with more
interaction channels than ever before. We believe consumers have come to expect a consistent, contextual, and
personalized experience across these channels, and therefore, organizations are seeking Customer Engagement
Optimization solutions to achieve better business outcomes.
• Evolving Employee Expectations. Employee expectations are also evolving. Employees want their voices to be heard and
their opinions to be taken into account. They want their skills and preferences to be considered and leveraged, and they
want to be able to do the right thing for the customer. Studies from the industry analyst community have reinforced the
impact of an engaged and empowered workforce, finding that when it comes to serving customers, happier, more
empowered employees can have a significant impact not only on the customer experience, but also a company’s financial
performance. We believe that this can be a significant differentiator for organizations that chose to act on these findings
and that Customer Engagement Optimization solutions can play an important role in helping organizations train and
develop employees and seek, analyze, and act on their opinions and feedback, and can contribute to a culture of
empowerment, customer centricity, and continuous improvement.
• Evolving Customer-Centric Organizations. Customer-centric organizations are increasingly looking to aggregate,
analyze, and act on big data to enhance operational efficiencies, build customer loyalty, and drive profitability. Today’s
organizations have a significant amount of structured and unstructured customer, workforce, and other business data that is
generated from numerous departments and multiple systems across the enterprise. We believe that customer-centric
organizations are increasingly seeking Customer Engagement Optimization solutions that allow them to collect and
analyze intelligence across different service channels to gain a better understanding of the performance of their workforce,
the effectiveness of their service processes, the quality of their interactions, and changing customer behaviors. When
captured, analyzed, and acted upon, organizations can use this Actionable Intelligence to help achieve important strategic
objectives, such as optimizing customer engagement, gaining a holistic view of customer service effectiveness, enhancing
loyalty, maximizing revenue, reducing operational costs, and mitigating risk.
Security Intelligence
We are a leading provider of Security Intelligence solutions. Our solutions are implemented in a variety of sectors, such as
government, law enforcement, transportation, critical infrastructure, and commercial organizations.
We believe that terrorism, criminal activities, cyber-attacks, and other security threats, combined with new and more complex
security challenges, are driving demand for innovative solutions that can enhance security through the extensive use of
Actionable Intelligence to help anticipate, prepare, and respond to security threats.
We believe that the key trends driving demand for Security Intelligence solutions include:
• Cyber Security—increasing frequency and complexity of cyber-attacks. As overall awareness of cyber risks has
increased over the years, so have the investments made by many organizations seeking greater protection from these risks.
However, despite investments in perimeter security and point solutions to address specific network and end-point
vulnerabilities, there have been many reported incidents of successful cyber-attacks, demonstrating that legacy approaches
are often not sufficient in protecting against these evolving and advanced threats. Organizations today face the challenge
of an increasing level of sophistication and volume of cyber-attacks. We believe this trend will continue and that many
organizations are unprepared to protect themselves against such attacks. We believe that cyber-attacks will become more
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targeted and sophisticated and that government and commercial organizations need an integrated cyber security platform
for better protection through Actionable Intelligence capabilities. Such capabilities include better detection of threats
through the tight integration of multiple point solutions and better protection through improved unified workflows and
analytics-based investigative capabilities.
• Communications Intelligence—increasing complexity of communications networks and demand for advanced
intelligence and investigative solutions. Law enforcement, national security, and intelligence agencies worldwide are
responsible for investigations related to criminal activities, national security, terrorist networks, drug trafficking, financial
crimes, and other illegal activities. Such investigations require highly complex methods and often involve collecting and
analyzing information from multiple sources, including communications networks. Further, in many countries,
communications service providers are mandated by government regulation to satisfy certain technical requirements for
delivering communication content and data to law enforcement and government authorities, and we believe that the
increasing complexity of and technological challenges present in communications networks coupled with the need for
communications intelligence are creating demand for Actionable Intelligence solutions.
•
Situational Awareness—demand for innovative, integrated solutions that combine physical security and intelligence to
better anticipate and respond to security threats. Government and commercial organizations, in connection with safe city,
border control, transportation security, critical infrastructure, and other large-scale security initiatives, are interested in
improving security by deploying innovative security solutions that enhance situational awareness while fusing data from a
wide range of security systems, including video and non-video sensors—such as audio, social media, access control, and
intrusion detection. By aggregating data from multiple sensors, situational awareness solutions enable efficient
information correlation and analysis; rapid, rules-based alerts and action; and the ability to share information easily within
and across agencies to facilitate timely response and investigation.
Fraud, Risk, and Compliance
Verint is an innovator and global provider of Fraud, Risk, and Compliance solutions. Our solutions are implemented across
many industries, including financial services, retail, and telecommunications service providers.
We believe that enterprise organizations are looking to generate Actionable Intelligence to identify and prevent fraud, mitigate
risk, and help ensure compliance with legal, regulatory, and internal requirements. Organizations across industries face the
challenge of identifying fraud and non-compliance driven by the significant growth in information and the development of
more sophisticated methods of intrusion that require advanced solutions to detect, mitigate, and prevent such breaches. The
consequences of fraud and non-compliance extend far beyond direct financial loss to serious risks associated with information
breaches that can harm both customers and organizations, leading to reputation damage, customer attrition, and in some cases
significant fines and personal liability for responsible individuals.
We believe that the key trends driving demand for Fraud, Risk, and Compliance solutions include:
• Ongoing fraud intensified by new vulnerabilities and sophisticated methods of attack. Fraud can take different forms
across industries, and organizations must be prepared to address these risks effectively. Many of these risks are fueled by
new system vulnerabilities and the rise of more sophisticated methods of attack. For example, in financial services, call
center fraud has driven the demand for new solutions based on voice biometrics and predictive analytics to help
authenticate customers. In retail, where profit margins are typically narrow, organizations are seeking solutions to
investigate suspicious activities and reduce theft in their stores. We believe that organizations are seeking new analytical
solutions that can analyze a wide range of information to better mitigate fraud and effectively manage risk.
• Organizations seeking innovative solutions to respond to rapidly-evolving legal and regulatory compliance
requirements. Financial and other regulations—such as the Dodd-Frank Wall Street Reform and Consumer Protection
Act, and the Payment Card Industry Data Security Standard (PCI DSS)—present tremendous compliance challenges.
Consumer financial protection requirements continue to increase across the globe, with costly, large-scale remediation
activities and significant financial penalties mandated for infractions. While organizations often have detailed processes
and procedures for their employees to follow in support of regulatory requirements, we believe that many lack the tools to
adequately capture and analyze the information they need, exposing these organizations to significant risk. We believe that
organizations are looking to evolve their practices and tools that support these areas, and that new, sophisticated
compliance solutions can help them address these requirements, mitigate risks, and make the necessary adjustments as
regulations and other requirements continue to evolve.
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• Organizations seeking innovative solutions to identify, prevent, and manage operational risks in a globally distributed
organization. Today, organizations are challenged to improve their risk assessment, management, and mitigation
capabilities across their global, distributive operations. As a result, we believe organizations are seeking innovative
solutions that aggregate risk-related data across disparate systems, enabling them to analyze and identify operational and
strategic risk, and then prioritize, act upon, and mitigate such risks.
Our Strategy
Our strategy to further enhance our position as a leading provider of Actionable Intelligence solutions worldwide includes the
following key elements:
• Continue to drive the development of Actionable Intelligence solutions for unstructured data. We were a pioneer in the
development of solutions that help commercial businesses and governmental organizations derive intelligence from both
structured and unstructured data. We intend to continue to drive the adoption of our Actionable Intelligence vision and
solutions by building the Verint brand; expanding our portfolio of Customer Engagement Optimization, Security
Intelligence, and Fraud, Risk, and Compliance solutions delivered from a single provider; leveraging our large install base
of customers; and offering services that help our customers maximize their investments in our solutions.
• Maintain market leadership through innovation and customer centricity. We believe that to compete successfully we
must continue to introduce solutions that better enable customers to derive Actionable Intelligence from their structured
and unstructured data. In order to do this, we intend to continue to make significant investments in research and
development, protect our intellectual property through patents and other means, and maintain regular dialog with our
customer base in order to anticipate and understand their business objectives, challenges, and requirements.
• Continue to expand our market presence through OEM and partner relationships. We have expanded our relationships
with OEMs and other channel partners. We believe that these relationships broaden our market coverage and help make
our solutions even more widely available on a global basis. We intend to continue expanding our existing relationships,
while creating new ones.
• Augment our organic growth with acquisitions. We examine acquisition opportunities regularly as a means to add
technology, increase our geographic presence, enhance our market leadership, and/or expand into adjacent markets.
Historically, we have engaged in acquisitions for all of these purposes and expect to continue doing so in the future when
strategic opportunities arise.
Our Operating Segments
We conduct our business through three operating segments—Enterprise Intelligence, Communications and Cyber Intelligence,
and Video and Situation Intelligence. Organizing our business through three operating segments allows us to align our
resources and domain expertise to more effectively address the Actionable Intelligence market. We address the Customer
Engagement Optimization market opportunity through solutions from our Enterprise Intelligence segment. We address the
Security Intelligence market opportunity through solutions from our Communications and Cyber Intelligence segment and
Video and Situation Intelligence segment, and we address the Fraud, Risk and Compliance market opportunity through
solutions from all three operating segments. Below is a summary of the solutions included in each of our segments. These
include solutions that we have sold in the past and new solutions introduced during the year.
The Enterprise Intelligence Segment
Our Enterprise Intelligence solutions are summarized in the following table.
SOLUTION
Engagement Analytics
Speech Analytics
DESCRIPTION
Provides Actionable Intelligence by correlating customer interactions and behaviors, and the
journeys customers take across the array of channels they use to connect with organizations.
Delivers analysis through dynamic dashboards, data visualization tools, and engagement
capabilities.
Provides a fast, smart, and accurate solution for analyzing and categorizing call recordings
according to each organization’s challenges and objectives, and proactively identifying root
cause of issues.
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Text Analytics
Enterprise Feedback
Management
Identity Authentication and
Fraud Detection
Employee Desktop
Case Management
Knowledge Management
Email and Whitemail
Management
Web Self-Service
Live Chat
and
Co-Browse
Social Engagement
Customer Communities
Quality Management
Recording
Workforce Management
Desktop and Process
Analytics
Performance Management
eLearning and Coaching
Analyzes text-based communications, including survey verbatims, postings on social media
sites, and customer service chat sessions.
Provides an enterprise-class platform to help organizations gain a complete view into the
perceptions, opinions, and intentions of their customers and employees via surveys delivered
via email, web, SMS, IVR, and mobile devices.
Combines recorder-embedded “passive” voice biometrics technology with unique predictive
analytics to screen calls against databases of both customer and fraudster “voiceprints.” Helps
improve the customer experience by authenticating legitimate customers faster, reducing call
handling and fraud-related losses.
Unifies the employee’s desktop by placing, in one location, all the customer contextual
information and business process driven-knowledge that an agent or employee needs for
omnichannel interactions, so they do not have to toggle between multiple screens.
Tracks the progress of customer and internal issues as they are resolved between various
parties in the organization, and enables enforcement and measurement of compliance and
quality.
Intelligently delivers complete and contextual answers to employees during an interaction and/
or to consumers over web self-service. Reduces effort and saves time for employees and
consumers with automated search results based on the context of an interaction.
Enables organizations to respond faster to customer emails, letters, and faxes, using less agent
time and reducing backlog of unanswered inquiries and unhappy customers.
Enables consumers to accomplish many tasks on their own without direct interaction with
customer service representatives.
Enables employees to help online customers when they need it the most-in real time via web
chat. Enables employees to help customers navigate the organization‘s website to complete
self-service transactions, or simply help them find what they are looking for. Both live chat
and co-browse solutions help customers complete their transactions at the most critical
junctures and reduce transaction abandonment.
Enables agents to leverage their knowledge base, case management and other support tools to
address customer issues and concerns expressed in social media.
Enables organizations to set up and manage public and private communities and forums on
behalf of their customers, partners, and employees in which knowledge sharing and
collaboration can occur as a high-value, low-effort customer engagement channel.
Provides sophisticated interaction assessment functionality, including intelligent evaluation
forms and automatic delivery of calls for evaluation according to quotas or contact-related
criteria. Enables organizations to deliver customer-driven quality by evaluating employees
using more interactions that are of high business value and relevance.
Reliably and securely captures, encrypts, archives, searches, and replays audio and screen
interactions for compliance, liability protection, quality management and analytics purposes.
Enables organizations to efficiently plan, forecast, and schedule employees to meet service
level goals by leveraging a unified, enterprise workforce management solution that provides
visibility into and singularly manages the work, the people, and the processes across customer
touchpoints in the contact center, back-office and branch operations.
Enables organizations to monitor and improve employee performance by capturing and
measuring their desktop application activities. Provides objective and unbiased visibility into
how work is performed at the employee desktop. Facilitates process automation and privacy,
and delivers real-time guidance and next best actions to employees.
Provides a comprehensive view of key performance indicators with performance scorecards
and reports on customer interactions, customer experience trends, and contact center, back-
office, branch, and customer service staff performance.
Enables enterprises to deliver web-based training to customer service staff desktops, including
learning clips created from recordings and other customized materials targeted to staff needs
and competencies. Features automated coaching capabilities that provide employees with
personalized guidance on how to improve their performance and enhance their skills.
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The Communications Intelligence Segment
Our Communications Intelligence solutions are summarized in the following table.
SOLUTION
Cyber Security Threat
Protection
Network Intelligence
Tactical Intelligence
Web, Cloud and Open
Source Intelligence
DESCRIPTION
Enables government, critical infrastructure, service providers, and enterprise organizations to
address advanced cyber-attacks by deploying an integrated cyber security platform capable of
delivering threat protection through Actionable Intelligence capabilities. Includes a system
that integrates multiple advanced detection engines and provides unified workflows for
investigation, behavioral analytics, and forensics that analyze attack paths, enable remediation,
and help protect against future attempts.
Enables law enforcement, national security, and intelligence agencies to generate Actionable
Intelligence from network traffic to rapidly uncover critical information for investigating and
proactively addressing criminal, national security, and terrorist threats. Can be configured to
address a wide range of communications networks and can scale to address large traffic
volumes.
Enables law enforcement, correction facilities, and government agencies to enhance field
operations of tactical units with real-time Actionable Intelligence. Helps neutralize criminal,
terrorist, and other threats by assisting tactical operation units to better focus on suspects and
suspicious behavior, and deploy field resources more effectively.
Enables investigative units of government and commercial organizations to leverage web,
cloud, and open source data in order to identify insights and help accelerate investigations of
fraud, criminal activities, terror, and national security threats. Helps transform large volumes
of content into structured data and relevant information, identify suspicious behavioral
patterns, identify location of suspects while using the web or mobile networks, and generates
supporting evidence.
Service Provider Compliance Helps communications service providers comply with ETSI, CALEA, and other lawful
interception regulations and standards. Supports many different network types and provides a
high degree of automation of the lawful interception compliance processes with complete audit
trails and low administrative overhead, and without disrupting service.
The Video Intelligence Segment
Our Video Intelligence solutions are summarized in the following table.
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SOLUTION
Situational Awareness
Platform
Enterprise Video
Management Software
DESCRIPTION
Integrates data from multiple sources, such as access control, video, intrusion, fire, public
safety, weather, social media, traffic, first responder, and other mobile device systems.
Provides a unified visualization layer and workflow enabling organizations to fuse, analyze,
and report information, and take action on risks, alarms, and incidents across business and
security systems. Helps to identify and mitigate risks, improve response times, increase
operational effectiveness, and reduce total cost of ownership.
Simplifies management of large volumes of video, including geographically dispersed
surveillance video, with a suite of applications that includes automated system health
monitoring, policy-based video distribution, networked video viewing, and investigation
management. Designed for interoperability with other enterprise systems.
Video Analytics
Analyzes video content to improve visibility, reduce risks and improve operational
performance in the following areas:
• Surveillance—automatically detects anomalies and activities of interest, such as
perimeter intrusion, unattended objects, camera tampering, and vehicles moving in the
wrong direction.
• Security—offers advanced analytics that integrate facial detection, facial recognition,
and license plate recognition capabilities for industrial applications, and further expand
business value by integrating with Point of Sale (POS), ATM, and teller transactions in
retail store and branch bank environments.
• Business—includes industry-specific analytics applications focused primarily on retail
and banking environments to help address both operational and strategic initiatives.
EdgeVMS
Performs networked video recording utilizing secure, embedded operating systems and market-
specific data integrations for security and fraud, risk, and compliance applications that require
local storage, as well as remote networking.
Public Safety Media
Recorder
Allows first responders (e.g., police, fire departments, and emergency medical services) to
capture, analyze, manage, and act on public safety data. Includes incident investigation,
evidence preparation, and compliance audit trail capabilities.
Customer Services
We offer a range of customer services, including implementation and training, consulting and managed services, and
maintenance support, to help our customers maximize their return on investment in our solutions.
Implementation and Training
Our solutions are implemented by our service organizations, authorized partners, resellers, or customers. Our implementation
services include project management, system installation, and commissioning, including integrating our solutions with our
customers’ environments and third-party solutions. Our training programs are designed to enable our customers to effectively
use our solutions and to certify our partners to sell, install, and support our solutions. Customer and partner training is provided
at the customer site, at our training centers around the world, and/or remotely online.
Consulting and Managed Services
Our management consulting capabilities include business strategy, process excellence, performance management, and project
and program management, and are designed to help our customers maximize the value of our solutions in their own
environments. We also offer managed services delivered on a subscription basis to help our customers gain further value from
their investments in our technology and minimize the need for additional resources. Our managed services enable us to help
ensure customers effectively manage our solutions and maximize the business insights produced, heighten customer
engagement, and create strong relationships working together in the process.
Maintenance Support
We offer a range of customer maintenance support programs to our customers and resellers, including phone, web, and email
access to technical personnel up to 24-hours-a-day, seven-days-a-week. Our support programs are designed to help ensure
long-term, successful use of our solutions. We believe that customer support is critical to retaining and expanding our customer
base. Our Enterprise Intelligence solutions are sold with a warranty of generally one year for hardware and 90 days for
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software. Our Communications Intelligence solutions and Video Intelligence solutions are sold with warranties that typically
range from 90 days to three years and, in some cases, longer. In addition, customers are typically provided the option to
purchase maintenance plans that provide a range of services, such as telephone support, advanced replacement, upgrades when
and if available, and on-site repair or replacement. Currently, the majority of our maintenance revenue is related to our
Enterprise Intelligence solutions.
Direct and Indirect Sales
We sell our solutions through our direct sales teams and indirect channels, including distributors, systems integrators, value-
added resellers (“VARs”), and OEM partners. Approximately half of our overall sales are made through partners, distributors,
resellers, and system integrators.
Each of our solutions is sold by trained, dedicated, regionally-organized direct and indirect sales teams. Our direct sales teams
are focused on large and mid-sized customers and, in many cases, co-sell with our other channels and sales agents. Our indirect
sales teams are focused on developing and supporting relationships with our indirect channels, which provide us with broader
market coverage, including access to their customer base, integration services, and presence in certain geographies and vertical
markets. Our sales teams are supported by business consultants, solutions specialists, and pre-sales engineers who, during the
sales process, help determine customer requirements and develop technical responses to those requirements. While we sell
directly and indirectly in all three of our segments, sales of our Video Intelligence solutions are primarily indirect, and sales of
our Communications Intelligence solutions are primarily direct. See “Risk Factors—Risks Related to Our Business—
Competition, Markets, and Operations—If we are unable to establish and maintain our relationships with third parties that
market and sell our products, our business and ability to grow could be materially adversely affected” under Item 1A of this
report.
Customers
Our solutions are used by more than 10,000 organizations in over 180 countries. In the year ended January 31, 2015, we
derived approximately 58%, 32% and 10% of our revenue from the sale of our Enterprise Intelligence solutions,
Communications Intelligence solutions, and Video Intelligence solutions, respectively. In the year ended January 31, 2014, we
derived approximately 55%, 32%, and 13% of our revenue from the sale of our Enterprise Intelligence solutions,
Communications Intelligence solutions, and Video Intelligence solutions, respectively. In the year ended January 31, 2013, we
derived approximately 58%, 28%, and 14% of our revenue from the sale of our Enterprise Intelligence solutions,
Communications Intelligence solutions, and Video Intelligence solutions, respectively. We are party to contracts with
customers in each of our segments, the loss of which could have a material adverse effect on the segment.
In the year ended January 31, 2015, we derived approximately 52%, 31%, and 17% of our revenue from sales to end users in
the Americas, in Europe, the Middle East and Africa (“EMEA”), and in the Asia-Pacific region (“APAC”), respectively. In the
year ended January 31, 2014, we derived approximately 56%, 20%, and 24% of our revenue from sales to end users in the
Americas, EMEA, and APAC, respectively. In the year ended January 31, 2013, we derived approximately 55%, 24%, and
21% of our revenue from sales to end users in the Americas, EMEA, and APAC, respectively. See also Note 18, “Segment,
Geographic, and Significant Customer Information” to our consolidated financial statements included under Item 8 of this
report for additional information and financial data about each of our operating segments and geographic regions.
For the year ended January 31, 2015, approximately one quarter of our business was generated from contracts with various
governments around the world, including local, regional, and national government agencies. Due to the unique nature of the
terms and conditions associated with government contracts generally, our government contracts may be subject to renegotiation
or termination at the election of the government customer. Some of our customer engagements require us to have security
credentials or to participate in projects through an approved legal entity.
Seasonality and Cyclicality
As is typical for many software and technology companies, our business is subject to seasonal and cyclical factors. 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, potentially by a significant margin. In addition, we generally receive a higher
volume of orders in the last month of a quarter, with orders concentrated in the later part of that month. We believe that these
seasonal and cyclical factors primarily reflect customer spending patterns and budget cycles, as well as the impact of
compensation incentive plans for our sales personnel. While seasonal and cyclical factors such as these are common in the
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software and technology industry, this pattern should not be considered a reliable indicator of our future revenue or financial
performance. Many other factors, including general economic conditions, also have an impact on our business and financial
results. See “Risk Factors” under Item 1A of this report for a more detailed discussion of factors which may affect our business
and financial results.
Research and Development
We continue to enhance the features and performance of our existing solutions and to introduce new solutions through
extensive research and development activities, including the development of new solutions, the addition of capabilities to
existing solutions, quality assurance, and advanced technical support for our customer services organization. In certain
instances, primarily in our Communications Intelligence segment, we may customize our products to meet the particular
requirements of our customers. Research and development is performed primarily in the United States, Israel, the United
Kingdom, Ireland, the Netherlands, and Indonesia for our Enterprise Intelligence segment; in Israel, Germany, Brazil, Cyprus,
and Bulgaria for our Communications Intelligence segment; and primarily in Israel, the United States, and Canada for our
Video Intelligence segment.
We believe that our future success depends on a number of factors, including among others, our ability to:
•
•
•
identify and respond to emerging technological trends and areas of growth in our markets;
develop and maintain competitive solutions that meet or exceed our customers’ changing needs and challenges;
enhance our existing products by adding features and functionality to meet or exceed specific customer needs or
differentiate our products from those of our competitors; and
•
attract, recruit, and retain highly skilled and experienced employees.
To support these efforts, we make significant investments in research and development every year. In the years ended January
31, 2015, 2014, and 2013, we spent approximately $173.8 million, $126.5 million, and $115.9 million, respectively, on research
and development, net. We allocate our research and development resources in response to market research and customer
demand for additional features and solutions. Our development strategy involves rolling out initial releases of our products and
adding features over time. We incorporate product feedback received from our customers into our product development
process. While the majority of our products are developed internally, in some cases, we also acquire or license technologies,
products, and applications from third parties based on timing and cost considerations. See “Risk Factors—Risks Related to
Our Business—Competition, Markets, and Operations—For certain products, components, or services, we rely on third-party
suppliers, manufacturers, and partners and if these relationships are interrupted we may not be able to obtain substitute
suppliers, manufacturers, or partners on favorable terms or at all, and we may be subject to other adverse effects” under Item
1A of this report.
As noted above, a significant portion of our research and development operations is located outside the United States. We have
also derived benefits from participation in certain government-sponsored programs, including those of the Israeli Office of the
Chief Scientist (“OCS”) and in other jurisdictions, for the support of research and development activities conducted in those
locations. The Israeli law under which these OCS grants are made limits our ability to manufacture products, or transfer
technologies, developed using these grants outside of Israel without permission from the OCS. See “Risk Factors—Risks
Related to Our Business—Competition, Markets, and Operations—Because we have significant foreign operations, we are
subject to geopolitical and other risks that could materially adversely affect our business” and “Risk Factors—Risks Related to
Our Business—Competition, Markets, and Operations—Conditions in and our relationship to Israel may materially adversely
affect our operations and personnel and may limit our ability to produce and sell our products or engage in certain transactions”
under Item 1A of this report for a discussion of certain risks associated with our foreign operations.
Manufacturing, Suppliers, and Service Providers
We rely on both unaffiliated manufacturing subcontractors, as well as on our internal operations, to produce, assemble, and
deliver our hardware products and solutions. We also rely on several unaffiliated manufacturing subcontractors for the supply
of specific proprietary hardware components and assemblies that are incorporated into our products and solutions. Our internal
manufacturing and assembly operations consist primarily of installing our software on externally purchased hardware
components, final assembly, repair, and testing, which involves the application of extensive quality control procedures to
materials, components, subassemblies, and systems. We also perform system integration functions prior to shipping turnkey
solutions to our customers. Our internal manufacturing and assembly operations are performed primarily in our German,
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Israeli, and Cypriot facilities for our Communications Intelligence solutions, and in our Canadian facilities for certain of our
Video Intelligence solutions. Our Enterprise Intelligence solutions are substantially all software and do not require any
significant internal manufacturing. Although we have occasionally experienced delays and shortages in the supply of
proprietary components in the past, we have, to date, been able to obtain adequate supplies of all components in a timely
manner from alternative sources, when necessary. We also rely on third parties to provide certain services to us or to our
customers, including hosting providers and providers of other cloud-based services. See “Risk Factors—Risks Related to Our
Business—Competition, Markets, and Operations—For certain products, components, or services, we rely on third-party
suppliers, manufacturers, and partners, and if these relationships are interrupted, we may not be able to obtain substitute
suppliers, manufacturers, or partners on favorable terms or at all, and we may be subject to other adverse effects” under Item
1A of this report for a discussion of risks associated with our manufacturing operations and suppliers.
Employees
As of January 31, 2015, we employed more than 4,800 professionals, including certain contractors, with approximately 40%,
26%, 23%, and 11% of our employees and contractors located in the Americas, Israel, EMEA (excluding Israel), and APAC,
respectively.
We consider our relationship with our employees to be good and a critical factor in our success. Our employees in the United
States are not covered by any collective bargaining agreements. In some cases, our employees outside the United States are
automatically subject to certain protections negotiated by organized labor in those countries directly with the government or
trade unions or are automatically entitled to severance or other benefits mandated under local laws. For example, while we are
not a party to any collective bargaining or other agreement with any labor organization in Israel, certain provisions of the
collective bargaining agreements between the Histadrut (General Federation of Laborers in Israel) and the Coordinating Bureau
of Economic Organizations (including the Manufacturers’ Association of Israel) are applicable to our Israeli employees by
virtue of expansion orders of the Israeli Ministry of Industry, Trade and Labor.
Intellectual Property Rights
General
Our success depends to a significant degree on the legal protection of our software and other proprietary technology. We rely
on a combination of patent, trade secret, copyright, and trademark laws, and confidentiality and non-disclosure agreements with
employees and third parties to establish and protect our proprietary rights.
Patents
As of January 31, 2015, we had more than 700 patents and patent applications worldwide. We have accumulated a significant
amount of proprietary know-how and expertise in developing Actionable Intelligence solutions. We regularly review new areas
of technology related to our businesses to determine whether they can and should be patented.
Licenses
While we employ many of our innovations exclusively in our products and services, we also engage in outbound and inbound
licensing of specific patented technologies. Our licenses are designed to prohibit unauthorized use, copying, and disclosure of
our software technology. When we license our software to customers, we require license agreements containing restrictions
and confidentiality terms customary in the industry in order to protect our proprietary rights in the software. These agreements
generally warrant that the software and propriety hardware will materially comply with written documentation and assert that
we own or have sufficient rights in the software we distribute and have not violated the intellectual property rights of others.
We license our products in a format that does not permit users to change the software code. See “Risk Factors—Risks Related
to Our Business—Competition, Markets, and Operations—For certain products, components, or services, we rely on third-party
suppliers, manufacturers, and partners, and if these relationships are interrupted, we may not be able to obtain substitute
suppliers, manufacturers, or partners on favorable terms or at all, and we may be subject to other adverse effects” under Item
1A of this report.
We license certain software, technology, and related rights for use in the manufacture and marketing of our products and pay
royalties to third parties under such licenses and other agreements. While it may be necessary in the future to seek or renew
licenses relating to various aspects of our products, we believe, based on industry practice, such licenses generally could be
obtained on commercially reasonable terms.
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Trademarks and Service Marks
We use various trademarks and service marks to protect the marks used in our business. We also claim common law
protections for other marks we use in our business. Competitors and other companies could adopt similar marks or try to
prevent us from using our marks, consequently impeding our ability to build brand identity and possibly leading to customer
confusion. See “Risk Factors—Risks Related to Our Business—Intellectual Property and Data/Systems Security—Our
intellectual property may not be adequately protected” under Item 1A of this report for a more detailed discussion regarding the
risks associated with the protection of our intellectual property.
Competition
We face strong competition in all of our markets, and we expect that competition will persist and intensify.
In our Enterprise Intelligence segment, our competitors include Aspect Software, Inc., eGain Corporation, Genesys
Telecommunications, NICE Systems Ltd. (“NICE”), Pegasystems Inc., and divisions of larger companies, including Oracle
Corporation and Salesforce.com, Inc., along with many smaller companies, which can vary across regions. In our
Communications Intelligence segment, our primary competitors include BAE Systems, FireEye, Inc., JSI Telecom, NICE,
Rohde & Schwarz, and RSA NetWitness (a business unit of EMC Corporation), along with a number of smaller companies and
divisions of larger companies that compete with us in certain regions or only with respect to portions of our product portfolio.
In our Video Intelligence segment, our competitors include Avigilon Corporation, Genetec Inc., March Networks (a subsidiary
of Infinova Ltd.), Milestone Systems A/S (a division of Canon), and NICE, and divisions of larger companies, such as Tyco
International Ltd., along with many smaller companies, which can vary across regions.
In each of our operating segments, we believe that we compete principally on the basis of:
•
•
•
•
•
•
product performance and functionality;
product quality and reliability;
breadth of product portfolio and pre-defined integrations;
global presence and high-quality customer service and support;
specific industry knowledge, vision, and experience; and
price.
We believe that our competitive success depends primarily on our ability to provide technologically advanced and cost-
effective solutions and services. Some of our competitors have superior brand recognition and significantly greater financial or
other resources than we do. We expect that competition will increase as other established and emerging companies enter our
markets or we enter theirs, and as new products, services, and technologies are introduced, such as SaaS. In addition,
consolidation is common in our markets and has in the past and may in the future improve the position of our competitors. See
“Risk Factors—Risks Related to Our Business—Competition, Markets, and Operations—Intense competition in our markets
and competitors with greater resources than us may limit our market share, profitability, and growth” under Item 1A of this
report for a more detailed discussion of the competitive risks we face.
Export Regulations
We and our subsidiaries are subject to applicable export control regulations in countries from which we export goods and
services. These controls may apply by virtue of the country in which the products are located or by virtue of the origin of the
content contained in the products. If the controls of a particular country apply, the level of control generally depends on the
nature of the goods and services in question. For example, our Communications Intelligence solutions tend to be more highly
controlled than our Enterprise Intelligence or Video Intelligence solutions. Where controls apply, the export of our products
generally requires an export license or authorization (either on a per-product or per-transaction basis) or that the transaction
qualify for a license exception or the equivalent, and may also be subject to corresponding reporting requirements.
Item 1A. Risk Factors
Many of the factors that affect our business and operations involve risks and uncertainties. The factors described below are
risks that could materially harm our business, financial condition, and results of operations. These are not all the risks we face
and other factors currently considered immaterial or unknown to us may have a material adverse impact on our future
operations.
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Risks Related to Our Business
Competition, Markets, and Operations
Our business is impacted by changes in general economic conditions and information technology and government
spending in particular.
Our business is subject to risks arising from adverse changes in domestic and global economic conditions. Slowdowns,
recessions, economic instability, political unrest, armed conflicts, or natural disasters around the world may cause companies
and governments to delay, reduce, or even cancel planned spending. In particular, declines in information technology spending
and limited or reduced government budgets have affected the markets for our solutions in both the enterprise intelligence
market and the security intelligence market in certain periods and in certain regions. For the year ended January 31, 2015,
approximately one quarter of our business was generated from contracts with various governments around the world, including
national, regional, and local government agencies. We expect that government contracts will continue to be a significant source
of our revenue for the foreseeable future. Customers or partners who are facing business challenges or liquidity issues are also
more likely to delay purchase decisions or cancel orders, as well as to delay or default on payments. If customers or partners
significantly reduce their spending with us or significantly delay or fail to make payments to us, our business, results of
operations, and financial condition would be materially adversely affected.
The industry in which we operate is characterized by rapid technological changes, evolving industry standards, and
changing market potential from area to area, and if we cannot anticipate and react to such changes our results may
suffer.
The markets for our products are characterized by rapidly changing technology and evolving industry standards. The
introduction of products embodying new technology, new delivery platforms such as SaaS, managed services, or other cloud-
based solutions, the commoditization of older technologies, and the emergence of new industry standards and technological
hurdles can exert pricing pressure on existing products and/or render them unmarketable or obsolete. Moreover, the market
potential and growth rates of the markets we serve are not uniform and are evolving. It is critical to our success that we are
able to anticipate and respond to changes in technology and industry standards and new customer challenges by consistently
developing new, innovative, high-quality products and services that meet or exceed the changing needs of our customers. We
must also successfully identify, enter, and prioritize areas of growing market potential, including by launching and driving
demand for new and enhanced solutions and services. If we are unable to execute on these strategic priorities, we may lose
market share or experience slower growth, and our profitability and other results of operations may be materially adversely
affected.
Intense competition in our markets and competitors with greater resources than us may limit our market share,
profitability, and growth.
We face aggressive competition from numerous and varied competitors in all of our markets, making it difficult to maintain
market share, remain profitable, invest, and grow. We are also encountering new competitors as we expand into new markets.
Our competitors may be able to more quickly develop or adapt to new or emerging technologies, better respond to changes in
customer needs or preferences, better identify and enter into new areas of growth, or devote greater resources to the
development, promotion, and sale of their products. Some of our competitors have, in relation to us, longer operating histories,
larger customer bases, longer standing relationships with customers, superior brand recognition, and significantly greater
financial, technical, marketing, customer service, public relations, distribution, or other resources, especially in new markets we
may enter. Consolidation among our competitors may also improve their competitive position. In recent years, several
companies significantly larger than we are have also entered or increased their presence in our markets through internal
development, partnerships, and acquisitions, and we have encountered larger competitors as we have expanded into new
markets. We also face competition from solutions developed internally by our customers or partners. To the extent that we
cannot compete effectively, our market share and, therefore, results of operations could be materially adversely affected.
Because price and related terms are key considerations for many of our customers, we may, from time to time, have to accept
less-favorable payment terms, lower the prices of our products and services, and/or reduce our cost structure, including
reducing headcount or investment in research and development, in order to remain competitive. Certain of our competitors
have become increasingly aggressive in their pricing strategy, particularly in markets where they are trying to establish a
foothold or defend existing installations. If we are forced to take these kinds of actions to remain competitive in the short-term,
such actions may adversely impact our ability to execute and compete in the long-term.
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Our future success depends on our ability to enhance our existing operations, execute on our growth strategy, and
properly manage investment in our business and operations.
We have experienced significant growth in recent years and our existing infrastructure, systems, processes, and personnel may
not be adequate for our current or future needs. A key element of our strategy is to continue to invest in, enhance, and secure
our business and operations and grow, both organically and through acquisitions. Investments in, among other things, new
markets, new products, solutions, and technologies, research and development, infrastructure and systems, geographic
expansion, and headcount are critical components in achieving this strategy. However, such investments and efforts may not be
successful, especially in new areas or new markets in which we have little or no experience, and even if successful, may
negatively impact our short-term profitability. Our success depends on our ability to effectively and efficiently enhance our
existing operations and execute on our growth strategy, including our ability to properly allocate limited investment dollars,
balance the extent and timing of investments with the associated impact on expenses and profitability, balance our focus
between new areas or new markets and the operation and servicing of our legacy businesses and customers, capture efficiencies
and economies of scale, and compete in the new areas or new markets and with the new solutions in which we have invested.
If we are unable to effectively and efficiently enhance our existing operations, execute on our growth strategy, and properly
manage our investments, focus, and expenditures, our results of operations and market share may be materially adversely
affected.
We may not be able to identify suitable targets for acquisition or investment, or complete acquisitions or investments on
terms acceptable to us, which could negatively impact our ability to implement our growth strategy.
As part of our growth strategy, we have made a number of acquisitions and investments and expect to continue to make
acquisitions and investments in the future, subject to the terms of our senior credit agreement (the "Credit Agreement"), the
indenture governing our 1.50% convertible senior notes due June 1, 2021 (the "Notes"), and other restrictions.
In many areas, we have seen the market for acquisitions become more competitive and valuations increase. In recent periods,
several of our competitors have also completed acquisitions of companies in or adjacent to our markets. As a result, it may be
more difficult for us to identify suitable acquisition or investment targets or to consummate acquisitions or investments once
identified on acceptable terms or at all. If we are not able to execute on our acquisition strategy, we may not be able to achieve
our growth strategy, may lose market share, or may lose our leadership position in one or more of our markets.
Our acquisition and investment activity presents certain risks to our business, operations, and financial position.
Acquisitions and investments are an important part of our strategy. Successful execution following the closing of an
acquisition or investment is paramount to achieving the anticipated benefits of the transaction. If we are unable to execute
successfully, we may experience both a loss on the investment and damage to our legacy business and valuation.
The process of integrating an acquired company's business into our operations and investing in new technologies is challenging
and may result in expected or unexpected operating or compliance challenges, which may require significant expenditures and
a significant amount of our management's attention that would otherwise be focused on the ongoing operation of our business.
The potential difficulties or risks of integrating an acquired company’s business include, among others:
•
•
•
•
•
•
•
•
the effect of the acquisition on our financial and strategic positions and our reputation;
risk that we fail to successfully implement our business plan for the combined business;
risk that we are unable to obtain the anticipated benefits of the acquisition, including synergies or economies of scale;
risk that the market does not accept the integrated product portfolio;
challenges in reconciling business practices or in integrating product development activities, logistics, or information
technology and other systems;
retention risk with respect to key customers, suppliers, and employees and challenges in assimilating and training new
employees;
challenges in complying with newly applicable laws and regulations, including obtaining or retaining required
approvals, licenses, and permits; and
potential impact on our internal controls over financial reporting.
Acquisitions and/or investments may also result in potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities, the expenditure of available cash, and amortization expenses or write-downs related to intangible assets
such as goodwill, any of which could have a material adverse effect on our operating results or financial condition.
Investments in immature businesses with unproven track records and technologies have an especially high degree of risk, with
the possibility that we may lose the value of our entire investments or incur additional unexpected liabilities. Transactions that
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are not immediately accretive to earnings may make it more difficult for us to maintain satisfactory profitability levels or
compliance with the maximum leverage ratio covenant under the revolving credit facility under our Credit Agreement. Large
or costly acquisitions or investments may also diminish our capital resources and liquidity or limit our ability to engage in
additional transactions for a period of time.
All of the foregoing risks may be magnified as the cost, size, or complexity of an acquisition or acquired company increases, or
where the acquired company’s products, market, or business are materially different from ours, or where more than one
integration is occurring simultaneously or within a concentrated period of time. There can be no assurance that we will be
successful in making additional acquisitions in the future or in integrating or executing on our business plan for existing or
future acquisitions.
Our solutions may contain defects or may be vulnerable to cyber-attacks, which could expose us to both financial and
non-financial damages.
Many of our existing solutions are and future solutions are expected to be sophisticated and may develop operational problems.
New products and new product versions also give rise to the risk of defects or errors. These defects or errors may relate to the
operation or the security of the products. If we do not discover and remedy such defects, errors, or other operational or security
problems until after a product has been released to customers or partners, we may incur significant costs to correct such
problems and/or become liable for substantial damages for product liability claims or other liabilities. Moreover, even products
that are well-designed and tested may be vulnerable to cyber-attacks. If one or more of our products are found to have defects
or errors, or if there is a successful cyber-attack on one of our products even absent a defect or error, it may also result in
questions regarding the integrity of our products generally, which could cause adverse publicity and impair their market
acceptance.
If we are unable to establish and maintain our relationships with third parties that market and sell our products, our
business and ability to grow could be materially adversely affected.
Approximately half of our sales are made through partners, distributors, resellers, and systems integrators. To remain
successful, we must maintain our existing relationships as well as identify and establish new relationships with such third
parties. We must often compete with other suppliers for these relationships and our competitors often seek to establish
exclusive relationships with these sales channels or to become a preferred partner for them. Our ability to establish and
maintain these relationships is based on, among other things, factors that are similar to those on which we compete for end
customers, including features, functionality, ease of use, installation and maintenance, and price. Even if we are able to secure
such relationships on terms we find acceptable, there is no assurance that we will be able to realize the benefits we anticipate.
Some of our channel partners may also compete with us or have affiliates that compete with us, or may partner with our
competitors or even offer our products and those of our competitors as alternatives when presenting proposals to end
customers. Our ability to achieve our revenue goals and growth depends to a significant extent on maintaining, enabling, and
adding to these sales channels, and if we are unable to do so, our business and ability to grow could be materially adversely
affected.
The sophisticated nature of our solutions, sales cycle, and unpredictable sales terms and timing may create uncertainty
in, or negatively impact, our operating results and make such results more volatile and difficult to predict.
The timing of our sales cycle ranges from as little as a few weeks to more than a year. Our larger sales, which we emphasize in
our sales strategy, typically require a minimum of a few months to consummate. As the length or complexity of a sales process
increases, so does the risk of successfully closing the sale. Larger sales are often made by competitive bid, which also
increases the time and uncertainty associated with such opportunities. In addition, because many of our solutions are
sophisticated, customers may also require education on the value and functionality of our solutions as part of the sales process,
further extending the time frame and uncertainty of the process.
Longer sales cycles, competitive bid processes, and the need to educate customers means that:
• There is greater risk of customers deferring, scaling back, or cancelling sales as a result of, among other things, their
receipt of a competitive proposal, changes in budgets and purchasing priorities, or the introduction or anticipated
introduction of new or enhanced products by us or our competitors during the process.
•
We may make a significant investment of time and money in opportunities that do not come to fruition, which
investments may not be usable or recoverable in future projects.
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• We may be required to bid on a project in advance of the completion of its design or be required to begin
implementation of a project in advance of finalizing a sale, in either case, increasing the risk of unforeseen
technological difficulties or cost overruns.
• We face greater downside risks if we do not correctly and efficiently deploy limited personnel and financial resources
and convert such sales opportunities into orders.
Our emphasis on larger solution sales also requires greater expertise in sales execution and transaction implementation than
more basic product sales, including in establishing and maintaining appropriate contacts and relationships with customers and
partners, product development, project management, staffing, integration, services, and support. Additionally, after the
completion of a solution sale or the sale of a more sophisticated product in general, our customers or partners may need
assistance from us in making full use of the functionality of these solutions or products, in realizing all of their benefits, or in
implementation generally. If we are unable to assist our customers and partners in realizing the benefits they expect from our
solutions and products, demand for our solutions and products may decline and our operating results may suffer.
The extended time frame and uncertainty associated with many of our sales opportunities also makes it difficult for us to
accurately forecast our revenues (and attendant budgeting and guidance decisions) and increases the volatility of our operating
results from period to period. Our ability to forecast, and the volatility of, our operating results is also impacted by the fact that
pricing, margins, and other deal terms may vary substantially from transaction to transaction, especially across business lines.
The terms of our transactions, including with respect to pricing, future deliverables, delivery model (e.g., perpetual license
versus SaaS), and post-contract customer support, also impact the timing of our ability to recognize revenue. Because these
transaction-specific factors are difficult to predict in advance, this also complicates the forecasting of revenue. Additionally,
because we emphasize larger transactions in our sales strategy, the deferral or loss of one or more significant orders or a delay
in a large implementation could materially adversely affect our operating results, especially in a given quarter. As with other
software-focused companies, a large amount of our quarterly business tends to come in the last few weeks, or even the last few
days, of each quarter. This trend has also complicated the process of accurately predicting revenue and other operating results,
particularly on a quarterly basis. Finally, our business is subject to seasonal factors that may also cause our results to fluctuate
from quarter to quarter.
For certain products, components, or services, we rely on third-party suppliers, manufacturers, and partners, and if
these relationships are interrupted we may not be able to obtain substitute suppliers, manufacturers, or partners on
favorable terms or at all and we may be subject to other adverse effects.
Although we generally use standard parts and components in our products, we do rely on non-affiliated suppliers and OEM
partners for certain non-standard products or components which may be critical to our products, including both hardware and
software, and on manufacturers of assemblies that are incorporated into our products. We also purchase technology, license
intellectual property rights, and oversee third-party development and localization of certain products or components, in some
cases, by or from companies that may compete with us or work with our competitors. While we endeavor to use larger, more
established suppliers, manufacturers, and partners wherever possible, in some cases, these providers may be smaller, less
established companies, particularly in the case of suppliers of new or unique technologies that we have not developed
internally. If these suppliers, manufacturers, or partners experience financial, operational, manufacturing capacity, or quality
assurance difficulties, cease production and sale of the products we buy from them entirely, or there is any other disruption,
including loss of license, OEM, or distribution rights, including as a result of the acquisition of a supplier or partner by a
competitor, we will be required to locate alternative sources of supply or manufacturing, to internally develop the applicable
technologies, to redesign our products, and/or to remove certain features from our products, any of which would be likely to
increase expenses, create delivery delays, and negatively impact our sales. Although we endeavor to put in place contracts with
key providers, including protections such as source code escrows (where needed), warranties, and indemnities, we may not be
successful in obtaining adequate protections, these agreements may be short-term in duration, and the counterparties may be
unwilling or unable to stand behind such protections. Moreover, these types of contractual protections offer limited practical
benefits to us in the event our relationship with a key provider is interrupted.
We also rely on third parties to provide certain services to us or to our customers, including hosting partners and providers of
other cloud-based services. If these third-party providers do not perform as expected, our customers may be adversely affected,
resulting in potential liability and negative exposure for us. If it is necessary to migrate these service to other providers as a
result of poor performance by these third parties or other financial or operational factors, it could result in service disruptions to
our customers and significant time and expense to us, any of which could adversely affect our business.
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If we cannot retain and recruit qualified personnel, our ability to operate and grow our business may be impaired.
We depend on the continued services of our management and employees to run and grow our business. To remain successful
and to grow, we need to retain existing employees and attract new employees who understand and/or have experience with our
products, services, and markets, especially new markets and growth areas we may enter. As we grow, we must also enhance
and expand our management team to execute on new and larger agendas and challenges. The market for qualified personnel is
competitive in the geographies in which we operate and may be limited especially in areas of emerging technology, and we
may be at a disadvantage to companies with greater brand recognition or financial resources in recruiting. If we are unable to
attract and retain qualified personnel, when and where they are needed, our ability to operate and grow our business could be
impaired. Moreover, if we are not able to properly balance investment in personnel with growth in our business, our
profitability may be adversely affected.
Because we have significant foreign operations, we are subject to geopolitical and other risks that could materially
adversely affect our business.
We have significant operations outside the United States, including sales, research and development, manufacturing, customer
services and support, and administrative services. The countries in which we have our most significant foreign operations
include Israel, the United Kingdom, India, Indonesia, the Netherlands, Cyprus, Australia, and Brazil and we intend to continue
to expand our operations internationally. We believe our business may suffer if we are unable to successfully expand into new
regions, as well as maintain and expand our existing foreign operations. Our foreign operations are, and any future foreign
expansion will be, subject to a variety of risks, many of which are beyond our control, including risks associated with:
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foreign currency fluctuations;
political, security, and economic instability or corruption in foreign countries;
changes in and compliance with both international and local laws and regulations, including those related to trade
compliance, anticorruption, data privacy and protection, tax, labor, employee benefits, customs, currency restrictions,
and other requirements;
differences in tax regimes and potentially adverse tax consequences of operating in foreign countries;
product customization or localization issues;
preferences for or policies and procedures that protect local suppliers;
legal uncertainties regarding intellectual property rights or rights and obligations generally;
recruitment and retention of qualified foreign employees; and
challenges or delays in collection of accounts receivable.
Any or all of these factors could materially adversely affect our business or results of operations.
Conditions in and our relationship to Israel may materially adversely affect our operations and personnel and may limit
our ability to produce and sell our products or engage in certain transactions.
We have significant operations in Israel, including research and development, manufacturing, sales, and support.
Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its
neighbors, which in the past have led, and may in the future lead, to security and economic problems for Israel. In
addition, Israel has faced and continues to face difficult relations with the Palestinians and the risk of terrorist violence from
both Palestinian as well as foreign elements such as Hezbollah. Infighting among the Palestinians may also create security and
economic risks to Israel. Current and future conflicts and political, economic, and/or military conditions in Israel and the
Middle East region have affected and may in the future affect our operations in Israel. The exacerbation of violence within
Israel or the outbreak of violent conflicts between Israel and its neighbors, including Iran, may impede our ability to
manufacture, sell, and support our products or engage in research and development, or otherwise adversely affect our business
or operations. In addition, many of our employees in Israel are required to perform annual compulsory military service and are
subject to being called to active duty at any time. The absence of these employees may have an adverse effect on our
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operations. Hostilities involving Israel may also result in the interruption or curtailment of trade between Israel and its trading
partners or a significant downturn in the economic or financial condition of Israel and could materially adversely affect our
results of operations.
Restrictive laws, policies, or practices in certain countries directed toward Israel, Israeli goods, or companies having operations
in Israel may also limit our ability to sell some of our products in certain countries.
We receive grants from the OCS for the financing of a portion of our research and development expenditures in Israel. The
availability in any given year of these OCS grants depends on OCS approval of the projects and related budgets that we submit
to the OCS each year. The Israeli law under which these OCS grants are made limits our ability to manufacture products, or
transfer technologies, developed using these grants outside of Israel. This may limit our ability to engage in certain outsourcing
or business combination transactions involving these products or require us to pay significant royalties or fees to the OCS in
order to obtain any OCS consent that may be required in connection with such transactions.
We are subject to complex, evolving regulatory requirements that may be difficult and expensive to comply with and
that could negatively impact our business.
Our business and operations are subject to a variety of regulatory requirements in the United States and abroad, including,
among other things, with respect to government contracts, labor, tax, import and export, anti-corruption, data privacy and
protection, and communications monitoring and interception. Compliance with these regulatory requirements may be onerous,
time-consuming, and expensive, especially where these requirements are inconsistent from jurisdiction to jurisdiction or where
the jurisdictional reach of certain requirements is not clearly defined or seeks to reach across national borders. Regulatory
requirements in one jurisdiction may make it difficult or impossible to do business in another jurisdiction. We may also be
unsuccessful in obtaining permits, licenses, or other authorizations required to operate our business, such as for the marketing
or sale or import or export of our products and services.
While we have implemented policies, procedures, and systems designed to achieve compliance with these regulatory
requirements, we cannot assure you that these policies, procedures, or systems will be adequate or that we or our personnel will
not violate these policies and procedures or applicable laws and regulations. Violations of these laws or regulations may harm
our reputation and deter government agencies and other existing or potential customers or partners from purchasing our
solutions. Furthermore, non-compliance with applicable laws or regulations could result in fines, damages, criminal sanctions
against us, our officers, or our employees, restrictions on the conduct of our business, and damage to our reputation.
Regulatory requirements, such as laws requiring telecommunications providers to facilitate the monitoring of communications
by law enforcement, may also influence market demand for many of our products and/or customer requirements for specific
functionality and performance or technical standards. The domestic and international regulatory environment is subject to
constant change, often based on factors beyond our control or anticipation, including political climate, budgets, and current
events, which could reduce demand for our products or require us to change or redesign products to maintain compliance or
competitiveness.
Loss of security clearances or political factors may adversely affect our business.
Some of our subsidiaries maintain security clearances domestically and abroad in connection with the development, marketing,
sale, and support of our Security Intelligence solutions. These clearances are reviewed from time to time by these countries and
could be deactivated, including for political reasons unrelated to the merits of our solutions, such as the list of countries we do
business with or the fact that our local entity is controlled by or affiliated with an entity based in another country. If we lose
our security clearances in a particular country, we may be unable to sell our Security Intelligence solutions for secure projects
in that country on a direct basis and might also experience greater challenges in selling such solutions even for non-secure
projects in that country. Even if we are able to obtain and maintain applicable security clearances, government customers may
decline to purchase our Security Intelligence solutions if they were not developed or manufactured in that country or if they
were developed or manufactured in other countries that are considered disfavored by such country. We may also experience
negative publicity or other adverse impacts on our business if we sell our Security Intelligence solutions to countries that are
considered disfavored by the media or political or social rights organizations even though such transactions may be permissible
under applicable law.
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Intellectual Property and Data/Systems Security
Our intellectual property may not be adequately protected.
While much of our intellectual property is protected by patents or patent applications, we have not and cannot protect all of our
intellectual property with patents or other registrations. There can be no assurance that patents we have applied for will be
issued on the basis of our patent applications or that, if such patents are issued, they will be sufficiently broad enough to protect
our technologies, products, or services. There can be no assurance that we will file new patent, trademark, or copyright
applications, that any future applications will be approved, that any existing or future patents, trademarks or copyrights will
adequately protect our intellectual property, or that any existing or future patents, trademarks, or copyrights will not be
challenged by third parties. Our intellectual property rights may not be successfully asserted in the future or may be invalidated,
designed around, or challenged.
In order to safeguard our unpatented proprietary know-how, source code, trade secrets, and technology, we rely primarily upon
trade secret protection and non-disclosure provisions in agreements with employees and other third parties having access to our
confidential information. There can be no assurance that these measures will adequately protect us from improper disclosure or
misappropriation of our proprietary information.
Preventing unauthorized use or infringement of our intellectual property rights is difficult even in jurisdictions with well-
established legal protections for intellectual property such as the United States. It may be even more difficult to protect our
intellectual property in other jurisdictions where legal protections for intellectual property rights are less established. If we are
unable to adequately protect our intellectual property against unauthorized third-party use or infringement, our competitive
position could be adversely affected.
Our products may infringe or may be alleged to infringe on the intellectual property rights of others, which could lead
to costly disputes or disruptions for us and may require us to indemnify our customers and resellers for any damages
they suffer.
The technology industry is characterized by frequent allegations of intellectual property infringement. In the past, third parties
have asserted that certain of our products infringed upon their intellectual property rights and similar claims may be made in
the future. Any allegation of infringement against us could be time consuming and expensive to defend or resolve, result in
substantial diversion of management resources, cause product shipment delays, or force us to enter into royalty or license
agreements. If patent holders or other holders of intellectual property initiate legal proceedings against us, either with respect to
our own intellectual property or intellectual property we license from third parties, we may be forced into protracted and costly
litigation, regardless of the merits of these claims. We may not be successful in defending such litigation, in part due to the
complex technical issues and inherent uncertainties in intellectual property litigation, and may not be able to procure any
required royalty or license agreements on terms acceptable to us, or at all. Third parties may also assert infringement claims
against our customers. Subject to certain limitations, we generally indemnify our customers and resellers with respect to
infringement by our products of the proprietary rights of third parties, which, in some cases, may not be limited to a specified
maximum amount and for which we may not have sufficient insurance coverage or adequate indemnification in the case of
intellectual property licensed from a third party. If any of these claims succeed, we may be forced to pay damages, be required
to obtain licenses for the products our customers or partners use, or incur significant expenses in developing non-infringing
alternatives. If we cannot obtain necessary licenses on commercially reasonable terms, our customers may be forced to stop
using or, in the case of resellers and other partners, stop selling our products.
Use of free or open source software could expose our products to unintended restrictions and could materially adversely
affect our business.
Some of our products contain free or open source software (together, open source software) and we anticipate making use of
open source software in the future. Open source software is generally covered by license agreements that permit the user to use,
copy, modify, and distribute the software without cost, provided that the users and modifiers abide by certain licensing
requirements. The original developers of the open source software generally provide no warranties on such software or
protections in the event the open source software infringes a third party's intellectual property rights. Although we endeavor to
monitor the use of open source software in our product development, we cannot assure you that past, present, or future products
will not contain open source software elements that impose unfavorable licensing restrictions or other requirements on our
products, including the need to seek licenses from third parties, to re-engineer affected products, to discontinue sales of affected
products, or to release all or portions of the source code of affected products. Any of these developments could materially
adversely affect our business.
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The mishandling or the perceived mishandling of sensitive information could harm our business.
Our products are in some cases used by customers to compile and analyze highly sensitive or confidential information and data,
including information or data used in intelligence gathering or law enforcement activities. While our customers' use of our
products in no way affords us access to the customer's sensitive or confidential information or data, we or our partners may
receive or come into contact with such information or data, including personally identifiable information, when we are asked to
perform services or support functions for our customers. We or our partners may also receive or come into contact with such
information or data in connection with our SaaS or other hosted or managed services offerings. We have implemented policies
and procedures and use information technology systems to help ensure the proper handling of such information and data,
including background screening of certain service personnel, non-disclosure agreements with employees and partners, access
rules, and controls on our information technology systems. Customers are also increasingly focused on the security of our
products and we work to ensure their security, including through the use of encryption, access rights, and other customary
security features, which vary based on the solution in question and customer requirements. However, these measures are
designed to mitigate the risks associated with handling or processing sensitive data and cannot safeguard against all risks at all
times. The improper handling of sensitive data, or even the perception of such mishandling (whether or not valid), or other
security lapses by us or our partners or within our products, could reduce demand for our products or otherwise expose us to
financial or reputational harm or legal liability.
We may be subject to information technology system failures or disruptions that could harm our operations, financial
condition, or reputation.
We rely extensively on information technology systems to operate and manage our business and to process, maintain, and
safeguard information, including information belonging to our customers, partners, and personnel. These systems may be
subject to failures or disruptions as a result of, among other things, natural disasters, accidents, power disruptions,
telecommunications failures, new system implementations, acts of terrorism or war, physical security breaches, computer
viruses, or other cyber-attacks. We have experienced cyber-attacks in the past and may experience them in the future,
potentially with greater frequency. While we are continually working to maintain secure and reliable systems, our security,
redundancy, and business continuity efforts may be ineffective or inadequate. We must continuously improve our design and
coordination of security controls across our business groups and geographies. Despite our efforts, it is possible that our security
controls and other procedures that we follow may not prevent systems failures or disruptions. Such system failures or
disruptions could subject us to research and development or production downtimes, delays in our ability to process orders,
delays in our ability to provide products and services to customers, including SaaS or other hosted or managed services
offerings, delays or errors in financial reporting, compromise, disclosure, or loss of sensitive or confidential information or
intellectual property, destruction or corruption of data, financial losses from remedial actions, liabilities to customers or other
third parties, or damage to our reputation. Information system failures at one of our partners, including hosting providers or
those who support other cloud-based offerings, may also result in similar adverse consequences. Any of the foregoing could
harm our competitive position, result in a loss of customer confidence, and materially and adversely affect our results of
operations or financial condition.
Risks Related to Our Finances and Capital Structure
If our goodwill or other intangible assets become impaired, our financial condition and results of operations could be
negatively affected.
Because we have historically acquired a significant number of companies, goodwill and other intangible assets have
represented a substantial portion of our assets. Goodwill and other intangible assets totaled approximately $1,513 million, or
approximately 64% of our total assets, as of January 31, 2015. We test our goodwill for impairment at least annually, or more
frequently if an event occurs indicating the potential for impairment, and we assess on an as-needed basis whether there have
been impairments in our other intangible assets. We make assumptions and estimates in this assessment which are complex and
often subjective. These assumptions and estimates can be affected by a variety of factors, including external factors such as
industry and economic trends, and internal factors such as changes in our business strategy or our internal forecasts. To the
extent that the factors described above change, we could be required to record additional non-cash impairment charges in the
future, which could negatively affect our financial condition and results of operations.
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We may be adversely affected by our acquisition of CTI or our historical affiliation with CTI and its former
subsidiaries.
As a result of the February 2013 acquisition of our former parent company, CTI (the "CTI Merger"), CTI's liabilities, including
contingent liabilities, have been consolidated into our financial statements. If CTI's liabilities are greater than represented, if
the contingent liabilities we have assumed become fixed, or if there are obligations of CTI of which we were not aware at the
time of completion of the CTI Merger, we may have exposure for those obligations and our business or financial condition
could be materially and adversely affected. Adjustments to the CTI consolidated group's tax liability for periods prior to the
CTI Merger could also affect the net operating losses ("NOLs") allocated to Verint as a result of the CTI Merger and cause us to
incur additional tax liability in future periods.
As a result of our historical affiliation with CTI and other members of the historical CTI consolidated tax group, we could also
become liable for taxes of other members of the CTI consolidated group for historical periods under certain circumstances.
Adjustments to the historical CTI consolidated group's tax liability for periods prior to Verint’s IPO could also affect the NOLs
allocated to Verint in the IPO and cause us to incur additional tax liability in future periods.
We are entitled to certain rights to indemnification from Comverse in connection with the transactions contemplated by our
agreement and plan of merger with CTI (the "CTI Merger Agreement") and the agreements entered into in connection with the
distribution by CTI to its shareholders of substantially all of its assets other than its interest in us (the "Comverse share
distribution"). However, there is no assurance that Comverse will be willing and able to provide such indemnification if
needed. If we become responsible for liabilities (including tax liabilities) not covered by indemnification or substantially in
excess of amounts covered by indemnification, or if Comverse becomes unwilling or unable to stand behind such protections,
our financial condition and results of operations could be materially and adversely affected.
Our financial results may be significantly impacted by changes in our tax position.
We are subject to taxes in the United States and numerous foreign jurisdictions. Our future effective tax rates could be affected
by changes in the mix of earnings in countries with differing statutory tax rates, changes in valuation allowance on deferred tax
assets (including our NOL carryforwards), changes in unrecognized tax benefits or changes in tax laws or their interpretation.
Any of these changes could have a material adverse effect on our profitability. In addition, the tax authorities in the
jurisdictions in which we operate, including the United States, may from time to time review the pricing arrangements between
us and our foreign subsidiaries or among our foreign subsidiaries. An adverse determination by one or more tax authorities in
this regard may have a material adverse effect on our financial results.
We have significant deferred tax assets which can provide us with significant future cash tax savings if we are able to use them,
including significant NOLs inherited as a result of the CTI Merger. However, the extent to which we will be able to use these
NOLs may be impacted, restricted, or eliminated by a number of factors, including changes in tax rates, laws or regulations,
whether we generate sufficient future taxable income, and possible adjustments to the tax attributes of CTI or its non-Verint
subsidiaries for periods prior to the CTI Merger. To the extent that we are unable to utilize our NOLs or other losses, our
results of operations, liquidity, and financial condition could be materially adversely affected. When we cease to have NOLs
available to us in a particular tax jurisdiction, either through their expiration, disallowance, or utilization, our cash tax liability
will increase in that jurisdiction.
Our international operations subject us to currency exchange risk.
We earn revenue, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar,
including the Israeli shekel, British pound sterling, euro, and Singapore dollar, among others. Because our consolidated
financial statements are presented in U.S. dollars, we must translate revenue, expenses, assets, and liabilities of entities using
non-U.S. dollar functional currencies into U.S. dollars using currency exchange rates in effect during or at the end of each
reporting period. Therefore, changes in currency exchange rates affect the translation of revenue and operating expenses that
are denominated in non-U.S. dollar functional currencies into U.S. dollars, which impacts our consolidated operating income.
In addition, our net income is further impacted by the revaluation and settlement of monetary assets and liabilities denominated
in currencies other than an entity’s functional currency, gains or losses on which are recorded within other income (expense),
net. We attempt to mitigate a portion of these risks through foreign currency hedging, based on our judgment of the appropriate
trade-offs among risk, opportunity and expense. However, our hedging activities are limited in scope and duration and may not
be effective at reducing the U.S. dollar cost of our global operations.
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In addition, our financial outlooks do not assume fluctuations in currency exchange rates. Adverse fluctuations in currency
exchange rates subsequent to providing our financial outlooks could cause our actual results to differ materially from those
anticipated in our outlooks, which could negatively affect our business.
We have a significant amount of indebtedness, which exposes us to leverage risks and subjects us to covenants which
may adversely affect our operations.
At March 13, 2015, we had total outstanding indebtedness of approximately $811 million under our Credit Agreement and the
Notes, meaning that we are significantly leveraged. Our leverage position may, among other things:
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limit our ability to obtain additional debt financing in the future for working capital, capital expenditures, acquisitions,
or other general corporate purposes;
require us to dedicate a substantial portion of our cash flow from operations to debt service, reducing the availability
of our cash flow for other purposes;
require us to repatriate cash for debt service from our foreign subsidiaries resulting in dividend tax costs or require us
to adopt other disadvantageous tax structures to accommodate debt service payments; or
increase our vulnerability to economic downturns, limit our ability to capitalize on significant business opportunities,
and restrict our flexibility to react to changes in market or industry conditions.
In addition, because our indebtedness under our Credit Agreement bears interest at a variable rate, we are exposed to risk from
fluctuations in interest rates in periods where market rates exceed the interest rate floor provided by our Credit Agreement.
The revolving credit facility under our Credit Agreement contains a financial covenant that requires us to maintain a maximum
consolidated leverage ratio. Our ability to comply with the leverage ratio covenant is dependent upon our ability to continue to
generate sufficient earnings each quarter, or in the alternative, to reduce expenses and/or reduce the level of our outstanding
debt and we cannot assure that we will be successful in any or all of these regards.
Our Credit Agreement also includes a number of restrictive covenants which limit our ability to, among other things:
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incur additional indebtedness or liens or issue preferred stock;
pay dividends or make other distributions or repurchase or redeem our stock or subordinated indebtedness;
engage in transactions with affiliates;
engage in sale-leaseback transactions;
sell certain assets;
change our lines of business;
• make investments, loans, or advances; and
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engage in consolidations, mergers, liquidations, or dissolutions.
These covenants could limit our ability to plan for or react to market conditions, to meet our capital needs, or to otherwise
engage in transactions that might be considered beneficial to us.
If certain events of default occur under our Credit Agreement, our lenders could declare all amounts outstanding to be
immediately due and payable. An acceleration of indebtedness under our Credit Agreement may result in an event of default
under the indenture governing the Notes. Additionally, if a change of control as defined in our Credit Agreement were to occur,
the lenders under our credit facilities would have the right to require us to repay all of our outstanding obligations under the
facilities.
If a fundamental change as defined in the indenture governing the Notes were to occur, the holders may require us to purchase
for cash all or any portion of their Notes at 100% of the principal amount of the Notes, plus accrued and unpaid interest.
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Additionally, in the event the conditional conversion feature of the Notes is triggered, holders of the Notes will be entitled to
convert their Notes during specified periods of time at their option. If one or more holders elect to convert their Notes, we may
be required to settle all or a portion of our conversion obligation in cash, which could adversely affect our liquidity.
If any of the events described in the foregoing paragraphs were to occur, in order to satisfy our obligations we may be forced to
seek an amendment of and/or waiver under our debt agreements, raise additional capital through securities offerings, asset
sales, or other transactions, or seek to refinance or restructure our debt. In such a case, there can be no assurance that we will
be able to consummate such a transaction on reasonable terms or at all.
We consider other financing and refinancing options from time to time, however, we cannot assure you that such options will
be available to us on reasonable terms or at all. If one or more rating agencies were to downgrade our credit ratings, that could
also impede our ability to refinance our existing debt or secure new debt, increase our future cost of borrowing, and create
third-party concerns about our financial condition or results of operations.
Our internal controls over financial reporting may not prevent misstatements and material weaknesses or deficiencies
could arise in the future which could lead to restatements or filing delays.
Our system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles ("GAAP"). Because of its inherent limitations, internal control
over financial reporting may not prevent or detect every misstatement. An evaluation of effectiveness is subject to the risk that
the controls may become inadequate because of changes in conditions, because the degree of compliance with policies or
procedures decreases over time, or because of unanticipated circumstances or other factors. As a result, although our
management has concluded that our internal controls are effective as of January 31, 2015, we cannot assure you that our
internal controls will prevent or detect every misstatement, that material weaknesses or other deficiencies will not occur or be
identified in the future, that this or future financial reports will not contain material misstatements or omissions, that future
restatements will not be required, or that we will be able to timely comply with our reporting obligations in the future.
The prices of our common stock and the Notes have been, and may continue to be, volatile and your investment could
lose value.
The prices of our common stock and the Notes have been, and may continue to be, volatile. Those prices could be affected by
any of the risk factors discussed in this Item. In addition, other factors that could impact the prices of our common stock and/or
the Notes include:
•
•
•
•
announcements by us or our competitors regarding, among other things, new products, product enhancements or
technological advances, acquisitions, major transactions, or management changes;
speculation in the press and the analyst community, including with respect to changes in recommendations or earnings
estimates by financial analysts, changes in investors' or analysts' valuation measures for our securities, our credit
ratings, and market trends unrelated to our performance;
stock sales by our directors, officers, or other significant holders;
hedging or arbitrage trading activity by third parties, including by the counterparties to the note hedge and warrant
transactions that we entered into in connection with the issuance of the Notes; and
•
dilution that may occur upon any conversion of the Notes.
A significant drop in the price of our common stock or the Notes could also expose us to the risk of securities class action
lawsuits, which could result in substantial costs and divert management's attention and resources, which could adversely affect
our business.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
The following describes our material properties as of the date of this report.
We lease a total of approximately 854,000 square feet of office space covering approximately 60 offices around the world and
we own an aggregate of approximately 89,000 square feet of office space at three sites in Scotland, Germany, and Indonesia.
Other than as described below, these properties are comprised of small and mid-sized facilities that are used to support our
administrative, marketing, manufacturing, product development, sales, training, support, and services needs for our three
operating segments.
Our corporate headquarters is located in a leased facility in Melville, New York, and consists of approximately 45,800 square
feet under a lease that expires in November 2015. The Melville facility is used primarily by our executive management and
corporate groups, including finance, legal and human resources, as well as for customer support and services for our Enterprise
Intelligence operations. On February 13, 2015, we entered into a new lease for a facility in Melville, New York, which we
expect to occupy on or about November 1, 2015. The new Melville facility will consist of approximately 49,000 square feet
under a lease that expires in 2027. The new Melville facility will serve as our corporate headquarters following the expiration
of our existing corporate headquarters lease in November 2015.
We lease approximately 132,700 square feet at a facility in Alpharetta, Georgia under a lease that expires in September 2026.
The Alpharetta facility is used primarily by the administrative, marketing, product development, support, and sales groups for
our Enterprise Intelligence operations.
We also occupy approximately 176,000 square feet at our main facility in Herzliya, Israel under a lease that expires in October
2015. This Herzliya facility is used primarily for manufacturing, storage, development, sales, marketing, and support related to
our Communications Intelligence operations, as well as for product development related to our Enterprise Intelligence and
Video Intelligence operations.
From time to time, we may lease or sublease portions of our owned or leased facilities to third parties based on our operational
needs. For additional information regarding our lease obligations, see Note 17, "Commitments and Contingencies" to our
consolidated financial statements included under Item 8 of this report.
We believe that our leased and owned facilities are in good operating condition and are adequate for our current requirements,
although growth in our business may require us to acquire additional facilities or modify existing facilities. We believe that
alternative locations are available on commercially reasonable terms in all areas where we currently do business.
Item 3. Legal Proceedings
On March 26, 2009, legal actions were commenced by Ms. Orit Deutsch, a former employee of our subsidiary, Verint Systems
Limited ("VSL"), against VSL in the Tel Aviv Regional Labor Court (Case Number 4186/09) (the “Deutsch Labor Action”) and
against CTI in the Tel Aviv District Court (Case Number 1335/09) (the “Deutsch District Action”). In the Deutsch Labor
Action, Ms. Deutsch filed a motion to approve a class action lawsuit on the grounds that she purports to represent a class of our
employees and former employees who were granted Verint and CTI stock options and were allegedly damaged as a result of the
suspension of option exercises during our previous extended filing delay period. In the Deutsch District Action, in addition to a
small amount of individual damages, Ms. Deutsch is seeking to certify a class of plaintiffs who were allegedly damaged due to
their inability to exercise Verint and CTI stock options as a result of alleged negligence by CTI in its financial reporting. The
class certification motions do not specify an amount of damages. On February 8, 2010, the Deutsch Labor Action was
dismissed for lack of material jurisdiction and was transferred to the Tel Aviv District Court and consolidated with the Deutsch
District Action. On March 16, 2009 and March 26, 2009, respectively, legal actions were commenced by Ms. Roni Katriel, a
former employee of CTI's former subsidiary, Comverse Limited, against Comverse Limited in the Tel Aviv Regional Labor
Court (Case Number 3444/09) (the “Katriel Labor Action”) and against CTI in the Tel Aviv District Court (Case Number
1334/09) (the “Katriel District Action”). In the Katriel Labor Action, Ms. Katriel is seeking to certify a class of plaintiffs who
were granted CTI stock options and were allegedly damaged as a result of the suspension of option exercises during CTI's
previous extended filing delay period. In the Katriel District Action, in addition to a small amount of individual damages, Ms.
Katriel is seeking to certify a class of plaintiffs who were allegedly damaged due to their inability to exercise CTI stock options
as a result of alleged negligence by CTI in its financial reporting. The class certification motions do not specify an amount of
damages. On March 2, 2010, the Katriel Labor Action was transferred to the Tel Aviv District Court, based on an agreed
motion filed by the parties requesting such transfer.
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On April 4, 2012, Ms. Deutsch and Ms. Katriel filed an uncontested motion to consolidate and amend their claims and on
June 7, 2012, the District Court allowed Ms. Deutsch and Ms. Katriel to file the consolidated class certification motion and an
amended consolidated complaint against VSL, CTI, and Comverse Limited. Following CTI's announcement of its intention to
effect the Comverse share distribution, on July 12, 2012, the plaintiffs filed a motion requesting that the District Court order
CTI to set aside up to $150.0 million in assets to secure any future judgment. The District Court ruled that it would not decide
this motion until the Deutsch and Katriel class certification motion was heard. Plaintiffs initially filed a motion to appeal this
ruling in August 2012, but subsequently withdrew it in July 2014.
Prior to the consummation of the Comverse share distribution, CTI either sold or transferred substantially all of its business
operations and assets (other than its equity ownership interests in us and Comverse) to Comverse or unaffiliated third parties.
On October 31, 2012, CTI completed the Comverse share distribution, in which it distributed all of the outstanding shares of
common stock of Comverse to CTI's shareholders. As a result of the Comverse share distribution, Comverse became an
independent public company and ceased to be a wholly owned subsidiary of CTI, and CTI ceased to have any material assets
other than its equity interest in us.
On February 4, 2013, we completed the CTI Merger. As a result of the CTI Merger, we have assumed certain rights and
liabilities of CTI, including any liability of CTI arising out of the Deutsch District Action and the Katriel District Action.
However, under the terms of the Distribution Agreement between CTI and Comverse relating to the Comverse share
distribution, we, as successor to CTI, are entitled to indemnification from Comverse for any losses we suffer in our capacity as
successor-in-interest to CTI in connection with the Deutsch District Action and the Katriel District Action.
Following an attempt to mediate the dispute, on July 1, 2014, the plaintiffs filed a notice with the District Court informing it
that the mediation process had been unsuccessful. As a result, the parties recently filed summations on the plaintiffs' motion to
certify the suit as a class action, which are under consideration by the District Court.
From time to time we or our subsidiaries may be involved in legal proceedings and/or litigation arising in the ordinary course
of our business. While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of
any current claims will have a material effect on our consolidated financial position, results of operations, or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities
Market Information
Our common stock trades on the NASDAQ Global Select Market under the symbol "VRNT".
The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as
reported by the NASDAQ Global Select Market.
Year Ended January 31, 2014:
First quarter
Second quarter
Third quarter
Fourth quarter
Year Ended January 31, 2015:
First quarter
Second quarter
Third quarter
Fourth quarter
Holders
Low
High
32.25
32.35
32.80
35.24
42.29
41.44
45.89
52.84
$
$
$
$
$
$
$
$
37.00
37.04
38.34
48.99
49.99
53.19
57.89
61.05
$
$
$
$
$
$
$
$
There were approximately 2,700 holders of record of our common stock at March 13, 2015. Such record holders include
holders who are nominees for an undetermined number of beneficial owners.
Dividends
We have not declared or paid any cash dividends on our equity securities and have no current plans to pay any dividends on our
equity securities. We intend to retain our earnings to finance the development of our business, repay debt, and for other
corporate purposes. In addition, the terms of our Credit Agreement restrict our ability to pay cash dividends on shares of our
common stock. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and
Capital Resources" included under Item 7 of this report and Note 6, "Long-Term Debt" to our consolidated financial statements
included under Item 8 of this report for a more detailed discussion of these limitations.
Any future determination as to the payment of dividends on our common stock will be made by our board of directors at its
discretion, subject to the limitations contained in our Credit Agreement and will depend upon our earnings, financial condition,
capital requirements, and other relevant factors.
Stock Performance Graph
The following table compares the cumulative total stockholder return on our common stock with the cumulative total return on
the NASDAQ Composite Index and the NASDAQ Computer & Data Processing Services Index, assuming an investment of
$100 on January 31, 2010 through January 31, 2015, and the reinvestment of any dividends. The comparisons in the graph
below are based upon (i) closing sale prices on NASDAQ for our common stock from July 6, 2010 through January 31, 2015
and (ii) the closing bid quotations on the over-the-counter securities market (as reported by the Pink Sheets) for the period prior
to July 6, 2010. This data is not indicative of, nor intended to forecast, future performance of our common stock.
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January 31,
2010
2011
2012
2013
2014
2015
Verint Systems Inc.
NASDAQ Composite Index
NASDAQ Computer & Data Processing Index
$100.00
$100.00
$100.00
$188.31
$126.90
$118.10
$154.54
$134.50
$124.19
$184.70
$152.96
$134.80
$248.31
$204.19
$196.61
$291.69
$231.72
$222.92
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 6. Selected Financial Data
The following selected consolidated financial data has been derived from our audited consolidated financial statements. The
data below should be read in conjunction with "Management’s Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 and our consolidated financial statements and notes thereto included under Item 8 of this report.
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Our historical results should not be viewed as indicative of results expected for any future period.
Five-Year Selected Financial Highlights:
Consolidated Statements of Operations Data
(in thousands, except per share data)
Revenue
Operating income
Net income
Net income attributable to Verint Systems Inc.
Net income attributable to Verint Systems Inc.
common shares
Net income per share attributable to Verint
Systems Inc.:
Basic
Diluted
Weighted-average shares:
Basic
Diluted
Year Ended January 31,
2015
2014
$ 1,128,436
$ 907,292
$
$
$
$
$
$
79,111
$ 122,286
36,402
30,931
30,931
0.53
0.52
$
$
$
$
$
58,776
53,757
53,583
1.01
0.99
58,096
59,374
52,967
53,878
$
$
$
$
$
$
$
2013
839,542
99,553
58,804
54,002
38,530
0.97
0.96
39,748
40,312
$
$
$
$
$
$
$
2012
782,648
86,478
40,625
36,993
22,203
0.58
0.56
38,419
39,499
$
$
$
$
$
$
$
2011
726,799
73,105
28,585
25,581
11,403
0.33
0.31
35,544
37,179
We have never declared a cash dividend to common stockholders.
Consolidated Balance Sheet Data
(in thousands)
Total assets
Long-term debt, including current maturities
Preferred stock
Total stockholders' equity
January 31,
2015
2014
2013
2012
2011
$ 2,350,996
$ 1,772,907
$ 1,564,269
$ 1,502,868
$ 1,376,127
$
$
736,802
$ 642,385
$
576,689
— $
— $
285,542
$ 1,004,903
$ 633,118
$
229,676
$
$
$
597,379
285,542
144,295
$
$
$
583,234
285,542
77,687
During the five-year period ended January 31, 2015, we acquired a number of businesses, the more significant of which were
the acquisitions of KANA in February 2014, UTX Technologies Limited ("UTX") in March 2014, Vovici Corporation in
August 2011, and Global Management Technologies in October 2011. The operating results of acquired businesses have been
included in our consolidated financial statements since their respective acquisition dates and have contributed to our revenue
growth.
In addition to the impact of our business acquisitions, our consolidated operating results and consolidated financial condition
for the years during the five-year period ended January 31, 2015 included the following notable transactions:
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As of and for
the year ended
January 31,
2015
• An income tax benefit of $44.4 million resulting from the reduction of a valuation allowance on our
deferred income tax assets recorded in connection with the acquisition of KANA; and
• Losses on early retirements of debt of $12.5 million, primarily associated with an amendment to our
Credit Agreement and the early partial retirement of our term loans.
Description
2014
• Completion of the CTI Merger on February 4, 2013; and
• Losses on early retirements of debt of $9.9 million, primarily associated with an amendment to our
Credit Agreement.
2013
• Professional fees and related expenses of $16.1 million associated with the CTI Merger.
2012
• A loss on early retirement of debt of $8.1 million associated with the termination of our prior credit
agreement.
2011
• Realized losses on an interest rate swap of $3.1 million; and
• Approximately $29 million in professional fees and related expenses associated with our restatement of
previously filed consolidated financial statements for periods through January 31, 2005 and our previous
extended filing delay period.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis of our financial condition and results of operations should be read in
conjunction with "Business" under Item 1, "Selected Financial Data" under Item 6, and our consolidated financial statements
and the related notes thereto included under Item 8 of this report. This discussion contains a number of forward-looking
statements, all of which are based on our current expectations and all of which could be affected by uncertainties and risks. Our
actual results may differ materially from the results contemplated in these forward-looking statements as a result of many
factors including, but not limited to, those described in "Risk Factors" under Item 1A of this report.
Overview
Our Business
Verint is a global leader in Actionable Intelligence solutions. Actionable Intelligence is a necessity in a dynamic world of
massive information growth because it empowers organizations with crucial insights and enables decision makers to anticipate,
respond, and take action. With Verint solutions and value-added services, organizations of all sizes and across many industries
can make more timely and effective decisions. Today, more than 10,000 organizations in over 180 countries, including over 80
percent of the Fortune 100, use Verint solutions to improve enterprise performance and make the world a safer place. Verint’s
vision is to create A Smarter World with Actionable Intelligence.
Our Actionable Intelligence solutions help organizations address three important challenges: Customer Engagement
Optimization; Security Intelligence; and Fraud, Risk, and Compliance. We help our customers capture large amounts of
information from numerous data types and sources, use analytics to glean insights from the information, and leverage the
resulting Actionable Intelligence to help achieve their customer engagement, enhanced security, and risk mitigation goals.
Headquartered in Melville, New York, we support our customers around the globe directly and with an extensive network of
selling and support partners.
We conduct our business through three operating segments—Enterprise Intelligence, Communications and Cyber Intelligence,
and Video and Situation Intelligence. Organizing our business through three operating segments allows us to align our
resources and domain expertise to more effectively address the Actionable Intelligence market. We address the Customer
Engagement Optimization market opportunity through solutions from our Enterprise Intelligence segment. We address the
Security Intelligence market opportunity through solutions from our Communications and Cyber Intelligence segment and
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Video and Situation Intelligence segment, and we address the Fraud, Risk, and Compliance market opportunity through
solutions from all three operating segments.
For the years ended January 31, 2015, 2014, and 2013, our Enterprise Intelligence segment represented approximately 58%,
55%, and 59% of our total revenue, respectively. For the years ended January 31, 2015, 2014, and 2013, our Communications
and Cyber Intelligence segment represented approximately 32%, 32%, and 27% of our total revenue, respectively. For the
years ended January 31, 2015, 2014, and 2013, our Video and Situation Intelligence segment represented approximately 10%,
13%, and 14% of our total revenue, respectively.
Generally, we make business decisions by evaluating the risks and rewards of the opportunities available to us in the markets
served by each of our segments. We view each operating segment differently and allocate capital, personnel, resources, and
management attention accordingly. In reviewing each operating segment, we also review the performance of that segment by
geography. Our marketing and sales strategies, expansion opportunities, and product offerings may differ materially within a
particular segment geographically, as may our allocation of resources between segments. When making decisions regarding
investment in our business, increasing capital expenditures, or making other decisions that may reduce our profitability, we also
consider the leverage ratio in our revolving credit facility. See "— Liquidity and Capital Resources" for more information.
Key Trends and Factors That May Impact our Performance
We believe that there are many factors that affect our ability to sustain and increase both revenue and profitability, including:
• Market acceptance of Actionable Intelligence solutions. We compete in markets where the value of certain aspects of our
products and solutions is still in the process of market acceptance. We believe that our future growth depends in part on the
continued and increasing acceptance and realization of the value of our product offerings.
• Evolving technologies and market potential. Our success depends in part on our ability to keep pace with technological
changes and evolving industry standards in our product offerings, successfully developing, launching, and driving demand
for new, innovative, high-quality products and services that meet or exceed customer needs, and identifying, entering, and
prioritizing areas of growing market potential.
•
Information technology and government spending. Our growth and results depend in part on general economic conditions
and the pace of information technology spending by both commercial and governmental customers.
See also "Risk Factors" under Item 1A of this report for a more complete description of these and other risks that may impact
future revenue and profitability.
Notable Developments During the Year Ended January 31, 2015
On February 3, 2014, we completed the acquisition of KANA, a leading provider of on-premises and cloud-based solutions
which create differentiated, personalized, and integrated customer experiences for large enterprises and mid-market
organizations, for net cash consideration of $516.6 million, through the merger of KANA Software, Inc.'s parent holding
company, Kay Technology Holdings, Inc. with an indirect, wholly owned subsidiary of ours, with Kay Technology Holdings,
Inc. continuing as the surviving company and as our wholly owned subsidiary.
The acquisition was funded through a combination of cash on hand, $300.0 million of incremental term loans incurred in
connection with an amendment to our Credit Agreement, and $125.0 million of borrowings under our revolving credit facility.
KANA has been substantially integrated into our Enterprise Intelligence operating segment.
On March 31, 2014, we completed the acquisition of all of the outstanding shares of UTX, a provider of certain mobile device
tracking solutions for security applications, from UTX Limited. UTX Limited was our supplier of these products to our
Communications Intelligence operating segment prior to the transaction. The purchase price for UTX was $84.2 million,
including $82.9 million of cash paid at closing. The acquisition of UTX was funded with cash on hand. UTX is based in the
EMEA region.
On June 18, 2014, we completed concurrent public offerings of 5,750,000 shares of our common stock and $400.0 million in
aggregate principal amount of 1.50% convertible senior notes due June 1, 2021 (the "Notes"). The aggregate net proceeds from
the concurrent offerings were $657.5 million, after deducting underwriters’ discounts and commissions, but excluding other
offering expenses. We used $15.6 million of the net proceeds to pay the net costs of an arrangement consisting of the purchase
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of call options and the sale of warrants to purchase our common stock, the intent of which is to reduce the potential dilution to
our common stock upon conversion of the Notes. We used the remainder of the net proceeds to repay a portion of the
outstanding indebtedness under our Credit Agreement.
Further details regarding our acquisitions and our long-term debt appear in Note 4, "Business Combinations" and Note 6,
"Long-Term Debt", respectively, to our consolidated financial statements included under Item 8 of this report.
Our Previous Extended Filing Delay Period and Related Matters
From March 2006 through March 2010, we did not make periodic filings with the SEC. This extended filing delay arose as a
result of certain internal and external investigations and reviews of accounting matters discussed in our prior public filings. In
connection with the foregoing and related matters, we incurred approximately $137 million of professional fees and related
expenses during the four years ended January 31, 2011.
Critical Accounting Policies and Estimates
An appreciation of our critical accounting policies is necessary to understand our financial results. The accounting policies
outlined below are considered to be critical because they can materially affect our operating results and financial condition, as
these policies may require us to make difficult and subjective judgments regarding uncertainties. The accuracy of these
estimates and the likelihood of future changes depend on a range of possible outcomes and a number of underlying variables,
many of which are beyond our control, and there can be no assurance that our estimates are accurate.
Revenue Recognition
Our revenue recognition policy is a critical component of determining our operating results and is based on a complex set of
accounting rules that require us to make significant judgments and estimates. We derive and report our revenue in two
categories: (a) product revenue, including sale of hardware products (which include software that works together with the
hardware to deliver the product's essential functionality) and licensing of software products, and (b) service and support
revenue, including revenue from installation services, post-contract customer support ("PCS"), project management, hosting
services, SaaS, product warranties, consulting and training services. Our customer arrangements may include any combination
of these elements. We follow the appropriate revenue recognition rules for each of these revenue streams. For additional
information, see Note 1, "Summary of Significant Accounting Policies" to our consolidated financial statements included under
Item 8 of this report. Revenue recognition for a particular arrangement is dependent upon such factors as the level of
customization within the solution and the contractual delivery, acceptance, payment, and support terms with the customer.
Significant judgment is required to conclude on each of these factors, and if we were to change any of these assumptions or
judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period.
We generally consider a purchase order or executed sales quote, when combined with a master license agreement, to constitute
evidence of an arrangement. Delivery occurs when the product is shipped or transmitted and title and risk of loss have
transferred to the customers. Our typical customer arrangements do not include substantive product acceptance provisions;
however, if such provisions are provided, delivery is deemed to occur upon acceptance. We consider the fee to be fixed or
determinable unless the fee is subject to refund or adjustment or is not payable within our standard payment terms. If the fee
due from a customer is not fixed or determinable due to extended payment terms, revenue is recognized when payment
becomes due or upon cash receipt, whichever is earlier.
Our multiple-element arrangements consist of a combination of our product and service offerings that may be delivered at
various points in time. For arrangements within the scope of the multiple-deliverable guidance, a deliverable constitutes a
separate unit of accounting when it has stand-alone value and there are no customer-negotiated refunds or return rights for the
delivered elements. For multiple-element arrangements comprised only of tangible products containing software components
and non-software components and related services, we allocate revenue to each element in an arrangement based on a selling
price hierarchy. The selling price for a deliverable is based on its vendor-specific objective evidence (“VSOE”), if available,
third-party evidence (“TPE”), if VSOE is not available, or estimated selling price (“ESP”), if neither VSOE nor TPE is
available. The total transaction revenue is allocated to the multiple elements based on each element's relative selling price
compared to the total selling price.
We account for multiple-element arrangements that contain only software and software-related elements by allocating a portion
of the total purchase price to the undelivered elements, primarily installation services, PCS, consulting, and training, using
VSOE of fair value of the undelivered elements. The remaining portion of the total transaction value is allocated to the
delivered software, referred to as the residual method. If we are unable to establish VSOE for the undelivered elements of the
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arrangement, revenue recognition is deferred for the entire arrangement until all elements of the arrangement are delivered.
However, if the only undelivered element is PCS, we recognize the arrangement fee ratably over the PCS period.
For multiple-element arrangements that are comprised of a combination of hardware and software elements, the total
transaction value is bifurcated between the hardware elements and the software elements that are not essential to the
functionality of the hardware, based on the relative selling prices of the hardware elements and the software elements as a
group. Revenue is then recognized for the hardware and hardware-related services following the hardware revenue recognition
methodology outlined above and revenue for the software and software-related services is recognized following the residual
method or ratably over the PCS period if VSOE for PCS does not exist.
Our policy for establishing VSOE for installation, consulting, and training is based upon an analysis of separate sales of
services. We utilize either the substantive renewal rate approach or the bell-shaped curve approach to establish VSOE for our
PCS offerings, depending upon the business segment, geographical region, or product line. The timing of revenue recognition
on software licenses and other revenue could be significantly impacted if we are unable to maintain VSOE on one or more
undelivered elements during any quarterly period. Loss of VSOE could result in (i) the complete deferral of all revenue or (ii)
ratable recognition of all revenue under a customer arrangement until such time as VSOE is re-established. If we are unable to
re-establish VSOE on one or more undelivered elements for an extended period of time it would impact our ability to
accurately forecast the timing of quarterly revenue, which could have a material adverse effect on our business, financial
position, results of operations or cash flows.
We typically are not able to determine TPE for our products or our service and support offerings. TPE of selling price is
established by evaluating largely similar and interchangeable competitor products or services in stand-alone sales to similarly
situated customers.
If we are unable to determine the selling price because VSOE or TPE does not exist, we determine ESP for the purposes of
allocating the arrangement by considering several external and internal factors including, but not limited to, pricing practices,
similar product offerings, margin objectives, geographies in which we offer our products and services, internal costs,
competition, and product lifecycle. The determination of ESP is made through consultation with and approval by our
management, taking into consideration our go-to-market strategies. We have established processes to update ESP for each
element, when appropriate, to ensure that it reflects recent pricing experience.
PCS revenue is derived from providing technical software support services and unspecified software updates and upgrades to
customers on a when-and-if-available basis. PCS revenue is recognized ratably over the term of the maintenance period which,
in most cases, is one year. When PCS is included within a multiple-element arrangement, we utilize either the substantive
renewal rate approach or the bell-shaped curve approach to establish VSOE of the PCS, depending upon the business operating
segment, geographical region, or product line.
Under the substantive renewal rate approach, we believe it is necessary to evaluate whether both the support renewal rate and
term are substantive, and whether the renewal rate is being consistently applied to subsequent renewals for a particular
customer. We establish VSOE under this approach through analyzing the renewal rate stated in the customer agreement and
determining whether that rate is above the minimum substantive VSOE renewal rate established for that particular PCS
offering. The minimum substantive VSOE rate is determined based upon an analysis of renewal rates associated with historical
PCS contracts. Typically, renewal rates of 15% for PCS plans that provide when-and-if-available upgrades, and 10% for plans
that do not provide for when-and-if-available upgrades, would be deemed to be minimum substantive renewal rates. For
contracts that do not contain a stated renewal rate, revenue associated with the entire bundled arrangement is recognized ratably
over the PCS term. Contracts that have a renewal rate below the minimum substantive VSOE rate are deemed to contain a more
than insignificant discount element, for which VSOE cannot be established. We recognize revenue for these arrangements over
the period that the customer is entitled to renew their PCS at the discounted rate, but not to exceed the estimated economic life
of the product.
Under the bell-shaped curve approach of establishing VSOE, we perform a VSOE compliance test to ensure that a substantial
majority (75% or over) of our actual PCS renewals are within a narrow range of plus or minus 15% of the median pricing.
Some of our arrangements require significant customization of the product to meet the particular requirements of the customer.
For these arrangements, revenue is recognized under contract accounting methods, typically using the percentage of completion
("POC") method. Under the POC method, revenue recognition is generally based upon the ratio of hours incurred to date to the
total estimated hours required to complete the contract. Profit estimates on long-term contracts are revised periodically based
on changes in circumstances, and any losses on contracts are recognized in the period that such losses become evident.
Generally, the terms of long-term contracts provide for progress billings based on completion of milestones or other defined
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phases of work. Significant judgment is often required when estimating total hours and progress to completion on these
arrangements, as well as whether a loss is expected to be incurred on the contract due to several factors including the degree of
customization required and the customer's existing environment. We use historical experience, project plans, and an assessment
of the risks and uncertainties inherent in the arrangement to establish these estimates. Uncertainties in these arrangements
include implementation delays or performance issues that may or may not be within our control.
Our SaaS offerings generally provide customers access to certain of our software within a cloud-based information technology
environment that we manage and offer to customers on a subscription basis. We recognize revenue for subscription and related
support services over the contract period originating when the subscription service is made available to the customer and the
contractual hosting period has commenced.
We extend customary trade payment terms to our customers in the normal course of conducting business. To assess the
probability of collection for purposes of revenue recognition, we have established credit policies that establish prudent credit
limits for our customers. These credit limits are based upon our risk assessment of the customer's ability to pay, their payment
history, geographic risk, and other factors, and are not contingent upon the resale of the product or upon the collection of
payments from their customers. These credit limits are reviewed and revised periodically on the basis of updated customer
financial statement information, payment performance, and other factors. When a customer is not deemed creditworthy,
revenue is recognized when payment is received.
We record provisions for estimated product returns in the same period in which the associated revenue is recognized. We base
these estimates of product returns upon historical levels of sales returns and other known factors. Actual product returns could
be different from our estimates and current or future provisions for product returns may differ from historical provisions.
Concessions granted to customers are recorded as reductions to revenue in the period in which they were granted and have been
minimal in both amount and frequency.
Product revenue derived from shipments to resellers and OEMs who purchase our products for resale are generally recognized
when such products are shipped (on a "sell-in" basis) since we do not expect our resellers or OEMs to carry inventory of our
products. This policy is predicated on our ability to estimate sales returns as well as other criteria regarding these customers.
We are also required to evaluate whether our resellers and OEMs have the ability to honor their commitment to make fixed or
determinable payments regardless of whether they collect payment from their customers. In this regard, we assess whether our
resellers and OEMs are new, poorly capitalized, or experiencing financial difficulty, and whether they have a pattern of not
paying as amounts become due on previous arrangements or seeking payment terms longer than those provided to end
customers. If we were to change any of these assumptions or judgments, it could cause a material change to the revenue
reported in a particular period. We have historically experienced insignificant product returns from resellers and OEMs, and our
payment terms for these customers are similar to those granted to our end-users. Our policy also presumes that we have no
significant performance obligations in connection with the sale of our products by our resellers and OEMs to their customers. If
a reseller or OEM develops a pattern of payment delinquency, or seeks payment terms longer than generally granted to our
resellers or OEMs, we defer the recognition of revenue from transactions with that reseller or OEM until the receipt of cash.
Multiple contracts with a single counterparty executed within close proximity of each other are evaluated to determine if the
contracts should be combined and accounted for as a single arrangement. We record reimbursements from customers for out-of-
pocket expenses as revenue. Shipping and handling fees and expenses that are billed to customers are recognized in revenue
and the costs associated with such fees and expenses are recorded in cost of revenue. Historically, these fees and expenses have
not been material. Taxes collected from customers and remitted to government authorities are excluded from revenue.
For multiple-element arrangements that contain software and software related elements for which we are unable to establish
VSOE of one or more elements, we use various available indicators of fair value and apply our best judgment to reasonably
classify the arrangement's revenue into product revenue and service revenue for financial reporting purposes.
Allowance for Doubtful Accounts
We estimate the collectability of our accounts receivable balances each accounting period and adjust our allowance for doubtful
accounts accordingly. We exercise a considerable amount of judgment in assessing the collectability of accounts receivable,
including consideration of the creditworthiness of each customer, their collection history, and the related aging of past due
accounts receivable balances. We evaluate specific accounts when we learn that a customer may be experiencing a deterioration
of its financial condition due to lower credit ratings, bankruptcy, or other factors that may affect its ability to render payment.
Accounting for Business Combinations
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We allocate the purchase price of acquired companies to the tangible and intangible assets acquired, including in-process
research and development assets, and liabilities assumed, based upon their estimated fair values at the acquisition date. These
fair values are typically estimated with assistance from independent valuation specialists. The purchase price allocation process
requires us to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets,
contractual support obligations assumed, and pre-acquisition contingencies.
Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are
based in part on historical experience and information obtained from the management of the acquired companies and are
inherently uncertain.
Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include
but are not limited to:
•
•
•
•
•
future expected cash flows from software license sales, support agreements, consulting contracts, other customer
contracts, and acquired developed technologies;
expected costs to develop in-process research and development into commercially viable products and estimated cash
flows from the projects when completed;
the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired
brand will continue to be used in the combined company’s product portfolio;
cost of capital and discount rates; and
estimating the useful lives of acquired assets as well as the pattern or manner in which the assets will amortize.
In connection with the purchase price allocations for applicable acquisitions, we estimate the fair value of the contractual
support obligations we are assuming from the acquired business. The estimated fair value of the support obligations is
determined utilizing a cost build-up approach, which determines fair value by estimating the costs related to fulfilling the
obligations plus a reasonable profit margin. The estimated costs to fulfill the support obligations are based on the historical
direct costs related to providing the support services. The sum of these costs and operating profit represents an approximation
of the amount that we would be required to pay a third party to assume the support obligations.
Impairment of Goodwill and Other Intangible Assets
We test goodwill for impairment at the reporting unit level, which can be an operating segment or one level below an operating
segment, on an annual basis as of November 1, or more frequently if changes in facts and circumstances indicate that
impairment in the value of goodwill may exist. As of January 31, 2015, our reporting units are consistent with our operating
segments identified in Note 18, "Segment, Geographic, and Significant Customer Information" to our consolidated financial
statements included under Item 8 of this report.
We review goodwill for impairment utilizing either a qualitative assessment or a two-step process. If we decide that it is
appropriate to perform a qualitative assessment and conclude that the fair value of a reporting unit more likely than not exceeds
its carrying value, no further evaluation is necessary. For reporting units where we perform the two-step process, the first step
requires us to estimate the fair value of each reporting unit and compare that fair value to the respective carrying value, which
includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired and
no further evaluation is necessary. If the carrying value is higher than the estimated fair value, there is an indication that
impairment may exist and the second step is required. In the second step, the implied fair value of goodwill is calculated as the
excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of
goodwill is less than the carrying value of the reporting unit’s goodwill, the difference is recognized as an impairment charge.
For reporting units where we decide to perform a qualitative assessment, we assess and make judgments regarding a variety of
factors which potentially impact the fair value of a reporting unit, including general economic conditions, industry and market-
specific conditions, customer behavior, cost factors, our financial performance and trends, our strategies and business plans,
capital requirements, management and personnel issues, and our stock price, among others. We then consider the totality of
these and other factors, placing more weight on the events and circumstances that are judged to most affect a reporting unit’s
fair value or the carrying amount of its net assets, to reach a qualitative conclusion regarding whether it is more likely than not
that the fair value of a reporting unit exceeds its carrying amount.
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For reporting units where we perform the two-step process, we utilize some or all of three primary approaches to assess fair
value: (a) an income-based approach, using projected discounted cash flows, (b) a market-based approach, using multiples of
comparable companies, and (c) a transaction-based approach, using multiples for recent acquisitions of similar businesses made
in the marketplace.
Our estimate of fair value of each reporting unit is based on a number of subjective factors, including: (a) appropriate
consideration of valuation approaches (income approach, comparable public company approach, and comparable transaction
approach), (b) estimates of future growth rates, (c) estimates of our future cost structure, (d) discount rates for our estimated
cash flows, (e) selection of peer group companies for the comparable public company and the comparable transaction
approaches, (f) required levels of working capital, (g) assumed terminal value, and (h) time horizon of cash flow forecasts.
The determination of reporting units also requires judgment. We assess whether a reporting unit exists within a reportable
segment by identifying the unit, determining whether the unit qualifies as a business under GAAP, and assessing the
availability and regular review by segment management of discrete financial information for the unit.
We review intangible assets that have finite useful lives and other long-lived assets when an event occurs indicating the
potential for impairment. If any indicators are present, we perform a recoverability test by comparing the sum of the estimated
undiscounted future cash flows attributable to the assets in question to their carrying amounts. If the undiscounted cash flows
used in the test for recoverability are less than the long-lived assets carrying amount, we determine the fair value of the long-
lived asset and recognize an impairment loss if the carrying amount of the long-lived asset exceeds its fair value. The
impairment loss recognized is the amount by which the carrying amount of the long-lived asset exceeds its fair value.
For all of our goodwill and other intangible asset impairment reviews, the assumptions and estimates used in the process are
complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and
economic trends, and internal factors such as changes in our business strategy or our internal forecasts. Although we believe the
assumptions, judgments, and estimates we have used in our assessments are reasonable and appropriate, a material change in
any of our assumptions or external factors could lead to future goodwill or other intangible asset impairment charges.
Based upon our November 1, 2014 goodwill impairment reviews, we concluded that the estimated fair values of our Enterprise
Intelligence and Communications Intelligence reporting units significantly exceeded their carrying values. Our Enterprise
Intelligence and Communications Intelligence reporting units carried goodwill of $1.1 billion and $101.3 million, respectively,
at January 31, 2015. The estimated fair value of our Video Intelligence reporting unit was approximately 20% greater than its
carrying value, which included $38.0 million of goodwill at January 31, 2015, and we have therefore concluded that this
reporting unit is at more than remote risk of failing step one of future goodwill impairment tests, and is therefore at risk of
future impairment in the event of significant unfavorable changes in the assumptions used in our impairment review, including
the weighted average cost of capital (discount rate) and growth rates utilized in our discounted cash flow analysis. Although we
believe that our current estimates are reasonable and appropriate, our Video Intelligence reporting unit competes in a
challenging environment and there can be no assurance that the estimates and assumptions made for purposes of our goodwill
impairment test will prove to be accurate predictions of future performance. Delays or declines in spending to install, upgrade
or maintain security intelligence systems, technological changes, new competitors, or changes in buying patterns from key
customers are examples of circumstances that could adversely impact the fair value of our Video Intelligence reporting unit.
We did not record any impairments of goodwill for the years ended January 31, 2015, 2014 or 2013.
Income Taxes
We account for income taxes under the asset and liability method which includes the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been included in our consolidated financial statements.
Under this approach, deferred taxes are recorded for the future tax consequences expected to occur when the reported amounts
of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the
current year plus deferred taxes. Deferred taxes result from differences between the financial statement and tax bases of our
assets and liabilities, and are adjusted for changes in tax rates and tax laws when changes are enacted. The effects of future
changes in income tax laws or rates are not anticipated.
We are subject to income taxes in the United States and numerous foreign jurisdictions. The calculation of our tax provision
involves the application of complex tax laws and requires significant judgment and estimates.
We evaluate the realizability of our deferred tax assets for each jurisdiction in which we operate at each reporting date, and we
establish a valuation allowance when it is more likely than not that all or a portion of our deferred tax assets will not be
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realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income of the same
character and in the same jurisdiction. We consider all available positive and negative evidence in making this assessment,
including, but not limited to, the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning
strategies. In circumstances where there is sufficient negative evidence indicating that our deferred tax assets are not more
likely than not realizable, we establish a valuation allowance.
We use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate tax positions
taken or expected to be taken in a tax return by assessing whether they are more likely than not sustainable, based solely on
their technical merits, upon examination, and including resolution of any related appeals or litigation process. The second step
is to measure the associated tax benefit of each position as the largest amount that we believe is more likely than not realizable.
Differences between the amount of tax benefits taken or expected to be taken in our income tax returns and the amount of tax
benefits recognized in our financial statements represent our unrecognized income tax benefits, which we either record as a
liability or as a reduction of deferred tax assets. Our policy is to include interest (expense and/or income) and penalties related
to unrecognized income tax benefits as a component of the provision for income taxes.
Contingencies
We recognize an estimated loss from a claim or loss contingency when and if information available prior to issuance of the
financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the
financial statements and the amount of the loss can be reasonably estimated. Accounting for claims and contingencies requires
the use of significant judgment and estimates. One notable potential source of loss contingencies is pending or threatened
litigation. Legal counsel and other advisors and experts are consulted on issues related to litigation as well as on matters related
to contingencies occurring in the ordinary course of business.
Accounting for Stock-Based Compensation
We recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair
value of the award.
During the three-year period ended January 31, 2015, restricted stock units were our predominant stock-based payment award.
The fair value of these awards is equivalent to the market value of our common stock on the grant date. We have also
occasionally awarded stock options, the fair value of which is estimated on the date of grant using an option-pricing model. We
use the Black-Scholes option-pricing model for this purpose, which requires the input of significant assumptions including an
estimate of the average period of time employees will retain stock options before exercising them, the estimated volatility of
our common stock price over the expected term, the number of options that will ultimately be forfeited before completing
vesting requirements, and the risk-free interest rate.
We periodically award restricted stock units that vest upon the achievement of specified performance goals. Our estimate of the
fair value of these performance-based awards requires an assessment of the probability that the specified performance criteria
will be achieved. At each reporting date, we update our assessment of the probability that the specified performance criteria
will be achieved and adjust our estimate of the fair value of the award, if necessary.
Changes in assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the
related expense recognized. The assumptions we use in calculating the fair value of stock-based payment awards represent our
best estimates, which involve inherent uncertainties and the application of judgment. As a result, if factors change and we use
different assumptions, our stock-based compensation expense could be materially different in the future.
Cost of Revenue
We have made an accounting policy election whereby certain costs of product revenue, including hardware and third-party
software license fees, are capitalized and amortized over the same period that product revenue is recognized, while installation
and other service costs are generally expensed as incurred, except for certain contracts recognized according to contract
accounting.
For example, in a multiple-element arrangement where revenue is recognized over the PCS support period, the cost of revenue
associated with the product is capitalized upon product delivery and amortized over that same period. However, the cost of
revenue associated with the services is expensed as incurred in the period in which the services are performed. In addition, we
expense customer acquisition and origination costs to selling, general and administrative expense, including sales commissions,
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as incurred, with the exception of certain sales referral fees in our Communications Intelligence segment which are capitalized
and amortized ratably over the revenue recognition period.
Results of Operations
Seasonality and Cyclicality
As is typical for many software and technology companies, our business is subject to seasonal and cyclical factors. 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, potentially by a significant margin. In addition, we generally receive a higher volume of orders in
the last month of a quarter, with orders concentrated in the later part of that month. We believe that these seasonal and cyclical
factors primarily reflect customer spending patterns and budget cycles, as well as the impact of incentive compensation plans
for our sales personnel. While seasonal and cyclical factors such as these are common in the software and technology industry,
this pattern should not be considered a reliable indicator of our future revenue or financial performance. Many other factors,
including general economic conditions, may also have an impact on our business and financial results.
Overview of Operating Results
The following table sets forth a summary of certain key financial information for the years ended January 31, 2015, 2014, and
2013:
(in thousands, except per share data)
Revenue
Operating income
Net income attributable to Verint Systems Inc. common shares
Net income per common share attributable to Verint Systems Inc.:
Basic
Diluted
$
$
$
$
$
2015
1,128,436
79,111
30,931
0.53
0.52
$
$
$
$
$
907,292
122,286
53,583
1.01
0.99
$
$
$
$
$
Year Ended January 31,
2014
2013
839,542
99,553
38,530
0.97
0.96
Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Our revenue increased approximately $221.1 million,
or 24%, to $1,128.4 million in the year ended January 31, 2015 from $907.3 million in the year ended January 31, 2014. In our
Enterprise Intelligence segment, revenue increased approximately $159.8 million, or 32%, to $658.7 million in the year ended
January 31, 2015 from $498.9 million in the year ended January 31, 2014. The increase consisted of a $132.9 million increase
in service and support revenue and a $26.9 million increase in product revenue. In our Communications Intelligence segment,
revenue increased approximately $71.4 million, or 25%, from $288.0 million in the year ended January 31, 2014 to $359.4
million in the year ended January 31, 2015. The increase consisted of a $54.9 million increase in product revenue and a $16.5
million increase in service and support revenue. In our Video Intelligence segment, revenue decreased approximately $10.0
million, or 8%, from $120.4 million in the year ended January 31, 2014 to $110.4 million in the year ended January 31, 2015,
primarily due to a decrease in product revenue. For additional details on our revenue by segment, see "—Revenue by
Operating Segment". Revenue in the Americas, EMEA, and APAC represented approximately 52%, 31%, and 17% of our total
revenue, respectively, in the year ended January 31, 2015, compared to approximately 56%, 20%, and 24%, respectively, in the
year ended January 31, 2014. The change in the percentage of revenue by geographical region in the year ended January 31,
2015 compared to the year ended January 31, 2014 primarily reflected the timing of revenue recognized in those regions under
several large contracts, primarily in our Communications Intelligence segment. Further details of changes in revenue are
provided below.
Operating income was $79.1 million in the year ended January 31, 2015 compared to $122.3 million in the year ended
January 31, 2014. This decrease in operating income was primarily due to $155.6 million increase in operating expenses, from
$478.6 million to $634.2 million, partially offset by a $112.4 million increase in gross profit from $600.9 million to $713.3
million. The increase in gross profit was primarily due to increased gross profit in our Enterprise Intelligence and
Communication Intelligence segments. Despite the increase in gross profit, our overall gross margin decreased from 66% in
the year ended January 31, 2014 to 63% in the year ended January 31, 2015 primarily due to a change in the mix of services
attributable to a business combination in our Enterprise Intelligence segment that closed during the year ended January 31,
2015. The increase in operating expenses consisted of a $87.9 million increase in selling, general and administrative expense,
a $47.2 million increase in net research and development expenses, and a $20.5 million increase in amortization of other
acquired intangible assets. Further details of changes in operating income are provided below.
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Net income attributable to Verint Systems Inc. common shares was $30.9 million, and diluted net income per common share
was $0.52, in the year ended January 31, 2015 compared to net income attributable to Verint Systems Inc. common shares of
$53.6 million, and diluted net income per common share of $0.99, in the year ended January 31, 2014. The decrease in net
income attributable to Verint Systems Inc. common shares and diluted net income per common share in the year ended
January 31, 2015 was primarily due to our decreased operating income, as described above, a $6.9 million increase in interest
expense, and a $2.6 million increase in losses upon early retirement of debt recorded during year ended January 31, 2015
compared to the year ended January 31, 2014. These decreases to net income attributable to Verint Systems Inc. common shares
were partially offset by and a $19.5 million decrease in our (benefit) provision for income taxes and a $10.7 million decrease in
other expense, net. During the year ended January 31, 2015, other expense, net, included net foreign currency losses of $13.4
million, partially offset by net gains on derivative instruments of $4.0 million. During the year ended January 31, 2014, other
expense, net, included a charge of $12.9 million for the derecognition of an indemnification asset associated with the resolution
of an uncertain tax position previously recorded in connection with the CTI Merger and net foreign currency losses of $6.1
million. Further details of changes in total other expense, net, are provided below.
A portion of our business is conducted in currencies other than the U.S. dollar, and therefore our revenue and operating
expenses are affected by fluctuations in applicable foreign currency exchange rates. When comparing average exchange rates
for the year ended January 31, 2015 to average exchange rates for the year ended January 31, 2014, while the U.S. dollar
weakened relative to the British pound sterling and our hedged Israeli shekel rate, it strengthened relative to the euro,
Australian dollar, Japanese yen, Brazilian real, and Singapore dollar, resulting in an overall decrease in our revenue and cost of
revenue. For operating expenses, the impact of the weakened U.S. dollar relative to the British pound sterling and our hedged
Israeli shekel rate was greater than the impact of the strengthening of the U.S. dollar against the euro, Australian dollar,
Japanese yen, Brazilian real, and Singapore dollar, resulting in an increase in operating expenses on a U.S. dollar-denominated
basis. For the year ended January 31, 2015, had foreign exchange rates remained unchanged from rates in effect for the year
ended January 31, 2014, our revenue would have been approximately $4.2 million higher and our cost of revenue and operating
expenses on a combined basis would have been approximately $3.8 million lower, which would have resulted in a $8.0 million
increase in operating income.
During the three months ended January 31, 2015, the U.S. dollar strengthened considerably relative to several foreign
currencies, particularly the British pound sterling and the euro. For the three months ended January 31, 2015, had foreign
exchange rates remained unchanged from rates in effect for the three months ended January 31, 2014, our revenue would have
been approximately $9.6 million higher and our cost of revenue and operating expenses on a combined basis would have been
approximately $8.1 million higher, which would have resulted in a $1.5 million increase in operating income.
As of January 31, 2015, we employed approximately 4,800 employees, including part-time employees and certain contractors,
as compared to approximately 3,400 at January 31, 2014. This increase was due to a combination of acquisitions and organic
growth.
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Our revenue increased approximately $67.8 million,
or 8%, to $907.3 million in the year ended January 31, 2014 from $839.5 million in the year ended January 31, 2013. In our
Communications Intelligence segment, revenue increased approximately $58.4 million, or 25%, from $229.6 million in the
year ended January 31, 2013 to $288.0 million in the year ended January 31, 2014. The increase consisted of a $39.5 million
increase in product revenue and a $18.9 million increase in service and support revenue. In our Enterprise Intelligence segment,
revenue increased approximately $8.4 million, or 2%, to $498.9 million in the year ended January 31, 2014 from $490.5
million in the year ended January 31, 2013. The increase consisted of a $22.0 million increase in service and support revenue,
partially offset by a $13.6 million decrease in product revenue. In our Video Intelligence segment, revenue increased
approximately $0.9 million, or 1%, from $119.5 million in the year ended January 31, 2013 to $120.4 million in the year ended
January 31, 2014, primarily due to an increase in product revenue. For additional details on our revenue by segment, see "-
Revenue by Operating Segment". Revenue in the Americas, EMEA, and APAC represented approximately 56%, 20%, and
24% of our total revenue, respectively, in the year ended January 31, 2014, compared to approximately 55%, 24%, and 21%,
respectively, in the year ended January 31, 2013. Further details of changes in revenue are provided below.
Operating income was $122.3 million in the year ended January 31, 2014 compared to $99.6 million in the year ended
January 31, 2013. This increase in operating income was primarily due to a $43.4 million increase in gross profit from $557.5
million to $600.9 million, partially offset by a $20.6 million increase in operating expenses, from $458.0 million to $478.6
million. The increase in gross profit was primarily due to increased gross profit in our Communications Intelligence segment.
The increase in operating expenses consisted of a $9.8 million increase in selling, general and administrative expense, a $10.6
million increase in net research and development expenses, and a $0.2 million increase in amortization of other acquired
intangible assets. Further details of changes in operating income are provided below.
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Net income attributable to Verint Systems Inc. common shares was $53.6 million, and diluted net income per common share
was $0.99, in the year ended January 31, 2014 compared to net income attributable to Verint Systems Inc. common shares of
$38.5 million, and diluted net income per common share of $0.96, in the year ended January 31, 2013. The increase in net
income attributable to Verint Systems Inc. common shares and diluted net income per common share in the year ended
January 31, 2014 was primarily due to our increased operating income, as described above, a $15.3 million decrease in
dividends on preferred stock resulting from the cancellation of our Series A Convertible Perpetual Preferred Stock in
connection with the CTI Merger, and a $4.4 million decrease in our provision for income taxes. These increases were partially
offset by a $27.2 million increase in total other expense, net, due primarily to the derecognition of a $12.9 million
indemnification asset due to the resolution of an uncertain tax position recorded in connection with the CTI Merger, a $7.0
million increase in foreign currency losses, net, and $9.9 million of losses upon early retirements of debt recorded during the
year ended January 31, 2014, which primarily related to the early retirement of the term loan under the 2011 Credit Agreement.
Further details of changes in total other expense, net, are provided below.
When comparing average exchange rates for the year ended January 31, 2014 to average exchange rates for the year ended
January 31, 2013, while the U.S. dollar weakened relative to the Israeli shekel, it strengthened relative to the British pound
sterling, Australian dollar, Japanese yen, and Brazilian real, resulting in an overall decrease in our revenue, cost of revenue and
operating expenses on a U.S. dollar-denominated basis. For the year ended January 31, 2014, had foreign exchange rates
remained unchanged from rates in effect for the year ended January 31, 2013, our revenue would have been approximately $2.2
million higher and our cost of revenue and operating expenses would have been approximately $0.1 million higher, which
would have resulted in a $2.1 million increase in operating income.
As of January 31, 2014, we employed approximately 3,400 employees, including part-time employees and certain contractors,
as compared to approximately 3,200 at January 31, 2013.
Revenue by Operating Segment
The following table sets forth revenue for each of our three operating segments for the years ended January 31, 2015, 2014, and
2013:
(in thousands)
Enterprise Intelligence
Communications Intelligence
Video Intelligence
Total revenue
Enterprise Intelligence Segment
$
2015
658,671
359,395
110,370
$ 1,128,436
Year Ended January 31,
2014
498,901
288,003
120,388
907,292
$
$
$
$
% Change
2013
490,478
229,607
119,457
839,542
2015 - 2014
32%
25%
(8)%
24%
2014 - 2013
2%
25%
1%
8%
Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Enterprise Intelligence revenue increased
approximately $159.8 million, or 32%, from $498.9 million in the year ended January 31, 2014 to $658.7 million in the year
ended January 31, 2015. The increase consisted of a $132.9 million increase in service and support revenue and a $26.9
million increase in product revenue. The increase in service and support revenue was primarily due to an increase in our
customer install base, both organically and through business combinations, and the related support revenue generated from this
customer base during the year ended January 31, 2015, as well as increased revenue from new service offerings in the year
ended January 31, 2015. The increase in product revenue was due to an increase in product sales to new customers during the
year ended January 31, 2015. The continued growth of service revenue is attributable to various factors, including an increase
in services associated with customer product upgrades, a higher component of service offerings in our standard arrangements,
and growth in our install base, both organic and as a result of business combinations. The aggregate value of executed license
arrangements, which comprises the majority of our product revenue, can fluctuate from period to period.
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Enterprise Intelligence revenue increased
approximately $8.4 million, or 2%, from $490.5 million in the year ended January 31, 2013 to $498.9 million in the year ended
January 31, 2014. The increase consisted of a $22.0 million increase in service and support revenue, offset by a $13.6 million
decrease in product revenue. The increase in service and support revenue was primarily due to an increase in our customer
install base and the related support revenue generated from this customer base during the year ended January 31, 2014. The
decrease in product revenue was primarily due to a decrease in product sales to new and existing customers during the year
ended January 31, 2014. The continued growth of service revenue is attributable to various factors, including an increase in
39
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services associated with customer product upgrades, a higher component of service offerings in our standard arrangements, and
growth in our install base.
Communications Intelligence Segment
Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Communications Intelligence revenue increased
approximately $71.4 million, or 25%, from $288.0 million in the year ended January 31, 2014 to $359.4 million in the year
ended January 31, 2015. The increase consisted of a $54.9 million increase in product revenue and a $16.5 million increase in
service and support revenue. The increase in product revenue was primarily due to an increase in product deliveries to
customers and an increase in progress realized during the current year on projects with revenue recognized using the percentage
of completion ("POC") method, some of which commenced in the previous fiscal year. The increase in service and support
revenue was primarily attributable to an increase in progress realized during the current year on projects with revenue
recognized using the POC method, some of which commenced in the previous fiscal year, and an increase in revenue from
software-as-a-service ("SaaS") offerings.
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Communications Intelligence revenue increased
approximately $58.4 million, or 25%, from $229.6 million in the year ended January 31, 2013 to $288.0 million in the year
ended January 31, 2014. The increase consisted of a $39.5 million increase in product revenue and an $18.9 million increase in
service and support revenue. Approximately $23.6 million of the increase in product revenue was primarily due to an increase
in product deliveries to a single large customer. The remaining $15.9 million of the increase in product revenue was primarily
due to an increase in progress realized during the current year on projects with revenue recognized using the POC method,
some of which commenced in the previous fiscal year. The increase in service and support revenue was primarily attributable to
an increase in the customer install base, the progress realized during the current year on projects with revenue recognized using
the POC method, some of which commenced in the previous fiscal year, and revenue from new communications intelligence
SaaS offerings.
Video Intelligence Segment
Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Video Intelligence revenue decreased approximately
$10.0 million, or 8%, from $120.4 million in the year ended January 31, 2014 to $110.4 million in the year ended January 31,
2015. The decrease was primarily attributable to a decrease in sales of certain hardware products to a single large customer
during the year ended January 31, 2015 as compared to the year ended January 31, 2014.
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Video Intelligence revenue increased approximately
$0.9 million, or 1%, from $119.5 million in the year ended January 31, 2013 to $120.4 million in the year ended January 31,
2014. The increase was primarily attributable to a $0.8 million increase in product revenue, resulting largely from an increase
in sales of certain hardware products to a single large customer during the year ended January 31, 2014 as compared to the year
ended January 31, 2013, partially offset by a decrease in product deliveries to other customers in the year ended January 31,
2014 as compared to the year ended January 31, 2013.
Volume and Price
We sell products in multiple configurations, and the price of any particular product varies depending on the configuration of the
product sold. Due to the variety of customized configurations for each product we sell, we are unable to quantify the amount of
any revenue increases attributable to a change in the price of any particular product and/or a change in the number of products
sold.
Product Revenue and Service and Support Revenue
We derive and report our revenue in two categories: (a) product revenue, including licensing of software products and sale of
hardware products (which include software that works together with the hardware to deliver the product's essential
functionality), and (b) service and support revenue, including revenue from installation services, post-contract customer
support, project management, hosting services, SaaS, product warranties, and training services. For multiple-element
arrangements for which we are unable to establish VSOE for one or more elements, we use various available indicators of fair
value and apply our best judgment to reasonably classify the arrangement's revenue into product revenue and service and
support revenue.
The following table sets forth product revenue and service and support revenue for the years ended January 31, 2015, 2014, and
2013:
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(in thousands)
Product revenue
Service and support revenue
Total revenue
Product Revenue
2015
487,617
640,819
$ 1,128,436
Year Ended January 31,
2014
416,478
490,814
907,292
$
$
$
$
$
% Change
2013
389,787
449,755
839,542
2015 - 2014
17%
31%
24%
2014 - 2013
7%
9%
8%
Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Product revenue increased approximately $71.1
million, or 17%, from $416.5 million for the year ended January 31, 2014 to $487.6 million for the year ended January 31,
2015, resulting from a $54.9 million increase in our Communications Intelligence segment and a $26.9 million increase in our
Enterprise Intelligence segment, partially offset by a $10.7 million decrease in our Video Intelligence segment.
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Product revenue increased approximately $26.7
million, or 7%, from $389.8 million for the year ended January 31, 2013 to $416.5 million for the year ended January 31, 2014,
resulting from a $39.5 million increase in our Communications Intelligence segment and a $0.8 million increase in our Video
Intelligence segment, partially offset by a $13.6 million decrease in our Enterprise Intelligence segment.
For additional information see "—Revenue by Operating Segment".
Service and Support Revenue
Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Service and support revenue increased approximately
$150.0 million, or 31%, from $490.8 million for the year ended January 31, 2014 to $640.8 million for the year ended
January 31, 2015. This increase was primarily attributable to increases of $132.9 million and $16.5 million in our Enterprise
Intelligence and Communications Intelligence segments, respectively.
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Service and support revenue increased approximately
$41.0 million, or 9%, from $449.8 million for the year ended January 31, 2013 to $490.8 million for the year ended January 31,
2014. This increase was primarily attributable to increases of $22.0 million and $18.9 million in our Enterprise Intelligence
and Communications Intelligence segments, respectively.
For additional information see "— Revenue by Operating Segment".
Cost of Revenue
The following table sets forth cost of revenue by product and service and support, as well as amortization of acquired
technology and backlog for the years ended January 31, 2015, 2014, and 2013:
(in thousands)
Cost of product revenue
Cost of service and support revenue
Amortization of acquired technology and
backlog
Total cost of revenue
$
$
Year Ended January 31,
2014
137,558
156,593
2015
144,870
239,274
$
$
% Change
2013
121,748
145,444
2015 - 2014
5%
53%
2014 - 2013
13%
8%
31,004
415,148
$
12,269
306,420
$
14,812
282,004
153%
35%
(17)%
9%
We exclude certain costs of both product revenue and service and support revenue, including shared support costs, stock-based
compensation, and asset impairment charges, among others, when calculating our operating segment gross margins.
Cost of Product Revenue
Cost of product revenue primarily consists of hardware material costs and royalties due to third parties for software
components that are embedded in our software solutions. When revenue is deferred, we also defer hardware material costs and
third-party software royalties and recognize those costs over the same period that the product revenue is recognized. Cost of
product revenue also includes amortization of capitalized software development costs, employee compensation and related
expenses associated with our global operations, facility costs, and other allocated overhead expenses. In our Communications
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Intelligence segment, cost of product revenue also includes employee compensation and related expenses, contractor and
consulting expenses, and travel expenses, in each case for resources dedicated to project management and associated product
delivery.
Our product gross margins are impacted by the mix of products that we sell from period to period. As with many other
technology companies, our software products tend to have higher gross margins than our hardware products.
Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Cost of product revenue increased approximately
5% from $137.6 million in the year ended January 31, 2014 to $144.9 million in the year ended January 31, 2015. Our overall
product gross margins increased to 70% in the year ended January 31, 2015 from 67% in the year ended January 31,
2014. Product gross margins in our Enterprise Intelligence segment increased from 92% in the year ended January 31, 2014 to
94% in the year ended January 31, 2015 primarily due to a continued decrease in hardware sales as part of our product
offerings. Product gross margins in our Communications Intelligence segment increased from 56% in the year ended
January 31, 2014 to 61% in the year ended January 31, 2015 primarily due to a change in product mix. Product gross margins
in our Video Intelligence segment increased to 59% in the year ended January 31, 2015 compared to 58% in the year ended
January 31, 2014 due to a change in product mix.
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Cost of product revenue increased approximately
13% from $121.7 million in the year ended January 31, 2013 to $137.6 million in the year ended January 31, 2014. Our overall
product gross margins decreased to 67% in the year ended January 31, 2014 from 69% in the year ended January 31,
2013. Product gross margins in our Enterprise Intelligence segment increased from 91% in the year ended January 31, 2013 to
92% in the year ended January 31, 2014 primarily as a result of lower third-party royalty expense, as well as a continued
decrease in hardware sales as part of our product offerings. Product gross margins in our Communications Intelligence segment
decreased from 57% in the year ended January 31, 2013 to 56% in the year ended January 31, 2014 primarily due to a change
in product mix. Product gross margins in our Video Intelligence segment increased to 58% in the year ended January 31, 2014
compared to 57% in the year ended January 31, 2013 due to a change in product mix.
Cost of Service and Support Revenue
Cost of service and support revenue primarily consists of employee compensation and related expenses, contractor costs, and
travel expenses relating to installation, training, consulting, and maintenance services. Cost of service and support revenue also
includes stock-based compensation expenses, facility costs, and other overhead expenses. In accordance with GAAP
and our accounting policy, the cost of service and support revenue is generally expensed as incurred in the period in which the
services are performed, with the exception of certain transactions accounted for using the POC method.
Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Cost of service and support revenue increased
approximately 53% from $156.6 million in the year ended January 31, 2014 to $239.3 million in the year ended January 31,
2015. Employee compensation and related expenses increased $51.3 million due primarily to increased headcount in our
Enterprise Intelligence segment in connection with a business combination that closed during the year ended January 31, 2015.
Contractor costs, travel expense, and materials expense incurred to provide services increased $10.2 million, $5.2 million, and
$8.2 million, respectively, primarily due to a business combination that closed during the year ended January 31, 2015 in our
Enterprise Intelligence segment. Stock-based compensation expense increased $3.4 million resulting from an increase in
average amounts of outstanding restricted stock units, and continued increases in our stock price, which impacts the total stock-
based compensation to be recognized over the vesting periods. Our overall service and support gross margins decreased from
68% in the year ended January 31, 2014 to 63% in the year ended January 31, 2015 primarily due to a change in the mix of
services in connection with a business combination that closed during the year ended January 31, 2015 in our Enterprise
Intelligence segment.
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Cost of service and support revenue increased
approximately 8% from $145.4 million in the year ended January 31, 2013 to $156.6 million in the year ended January 31,
2014. Employee compensation and related expenses increased $8.0 million, primarily driven by $5.2 million and $2.0 million
increases in our Enterprise Intelligence and Communications Intelligence segments, respectively, reflecting an increase in
employee headcount required to deliver the increased implementation services. Contractor costs increased $2.9 million, of
which $2.7 million was due to increased use of contractors in our Enterprise Intelligence segment to deliver services during the
year ended January 31, 2014 compared to the year ended January 31, 2013. These increases were partially offset by a $0.5
million decrease in travel costs primarily in our Enterprise Intelligence segment, and a $0.4 million decrease in stock-based
compensation expense attributable to service and support employees. Our overall service and support gross margins were 68%
in each of the years ended January 31, 2014 and 2013.
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Amortization of Acquired Technology and Backlog
Amortization of acquired technology and backlog consists of amortization of technology assets and customer backlog acquired
in connection with business combinations.
Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Amortization of acquired technology and backlog
increased approximately 153% from $12.3 million in the year ended January 31, 2014 to $31.0 million in the year ended
January 31, 2015 primarily due to an increase in amortization expense of acquired technology-based intangible assets
associated with business combinations that closed during the year ended January 31, 2015.
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Amortization of acquired technology and backlog
decreased approximately 17% from $14.8 million in the year ended January 31, 2013 to $12.3 million in the year ended
January 31, 2014, primarily due to a reduction in amortization of acquired technology from a historical business combination,
which became fully amortized during the year ended January 31, 2014, partially offset by an increase in amortization expense
of acquired technology-based intangible assets associated with business combinations that closed during the year ended
January 31, 2014.
Further discussion regarding our business combinations appears in Note 4, "Business Combinations" to our consolidated
financial statements included under Item 8 of this report.
Research and Development, Net
Research and development expenses consist primarily of personnel and subcontracting expenses, facility costs, and other
allocated overhead, net of certain software development costs that are capitalized as well as reimbursements under government
programs. Software development costs are capitalized upon the establishment of technological feasibility and continue to be
capitalized through the general release of the related software product.
The following table sets forth research and development, net for the years ended January 31, 2015, 2014, and 2013:
(in thousands)
Research and development, net
$
Year Ended January 31,
2014
126,539
$
$
2015
173,748
% Change
2013
115,906
2015 - 2014
37%
2014 - 2013
9%
Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Research and development, net increased
approximately $47.2 million, or 37%, from $126.5 million in the year ended January 31, 2014 to $173.7 million in the year
ended January 31, 2015. The increase was primarily attributable to an $37.0 million increase in employee compensation and
related expenses due primarily to an increase in employee headcount in connection with business combinations that closed
during the year ended January 31, 2015 in our Enterprise Intelligence and Communication Intelligence segments. Stock-based
compensation expense increased $3.0 million resulting from an increase in average amounts of outstanding restricted stock
units, and continued increases in our stock price, which impacts the total stock-based compensation to be recognized over the
vesting periods. Contractor expense increased $2.4 million due to increased use of contractors for research and development
activities in our Communications Intelligence segment during the year ended January 31, 2015 compared to the year ended
January 31, 2014.
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Research and development, net increased
approximately $10.6 million, or 9%, from $115.9 million in the year ended January 31, 2013 to $126.5 million in the year
ended January 31, 2014. The increase was primarily attributable to a $6.8 million increase in employee compensation and
related expenses, which resulted from increases in employee headcount in our Enterprise Intelligence and Communication
Intelligence segments and merit increases to employee salaries, and a $2.1 million increase in contractor expense primarily due
to increased use of contractors in our Communications Intelligence and Enterprise Intelligence segments during the year ended
January 31, 2014 compared to the year ended January 31, 2013, as well as a $0.8 million increase in stock-based compensation
resulting from an increase in average amounts of outstanding restricted stock units, and continued increases in our stock price,
which impacts the total stock-based compensation to be recognized over the vesting periods, in each case associated with our
research and development employees.
Selling, General and Administrative Expenses
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Selling, general and administrative expenses consist primarily of personnel costs and related expenses, professional fees, sales
and marketing expenses, including travel, sales commissions and sales referral fees, facility costs, communication expenses,
and other administrative expenses.
The following table sets forth selling, general and administrative expenses for the years ended January 31, 2015, 2014, and
2013:
(in thousands)
Selling, general and administrative
$
Year Ended January 31,
2014
327,385
$
$
2015
415,266
% Change
2013
317,637
2014 - 2013
27%
2014 - 2013
3%
Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Selling, general and administrative expenses
increased approximately $87.9 million, or 27%, from $327.4 million in the year ended January 31, 2014 to $415.3 million in
the year ended January 31, 2015. Employee compensation and related expenses increased $34.5 million due primarily to
increased employee headcount in our Enterprise Intelligence and Communications Intelligence segments, as well as an increase
in employee headcount for corporate support employees. Stock-based compensation expense increased $12.6 million due
primarily to an increase in average amounts of outstanding restricted stock units, and continued increases in our stock price,
which impacts the total stock-based compensation to be recognized over the vesting periods. Sales and marketing expense,
travel expense, and facilities expense increased $3.8 million, $4.0 million, and $6.4 million, respectively, due primarily to
business combinations that closed during the year ended January 31. 2015. Also contributing to the increase in selling, general,
and administrative expense was a $9.9 million increase in agent commissions expense in our Communication Intelligence
segment, a $5.6 million increase in contractor expense due primarily to increased use of contractors for corporate support
activities, including acquisition and integration related expenses, and a $3.5 million increase in the change in fair value of our
obligations under contingent consideration arrangements. These increases were partially offset by a decrease of $3.5 million in
expenses from special performance incentives associated with a prior period business combination that were included in
selling, general, and administrative expenses for the year ended January 31, 2014 with no equivalent expenses in the year ended
January 31, 2015.
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Selling, general and administrative expenses
increased approximately $9.8 million, or 3%, from $317.6 million in the year ended January 31, 2013 to $327.4 million in the
year ended January 31, 2014 primarily due to a $9.4 million increase in stock-based compensation resulting from an increase in
average amounts of outstanding restricted stock units, and continued increases in our stock price, which impacts the total stock-
based compensation to be recognized over the vesting periods, a $6.4 million increase in costs associated with business
combinations, a decrease in the change in fair value of our obligations under contingent consideration arrangements (from a
benefit of $6.2 million to a benefit of $2.5 million), resulting in a $3.7 million increase to selling, general, and administrative
expenses, a $4.4 million increase in employee compensation and related expenses, $2.5 million of which was attributable to an
increase in headcount in corporate support employees and the remainder due primarily to increased selling and marketing
employee headcount in our Communications Intelligence segment. Also included in selling, general, and administrative
expenses for the year ended January 31, 2014 were $3.5 million of special performance incentives associated with a prior
period business combination. These increases were partially offset by a $15.5 million decrease in professional fees incurred in
connection with the CTI Merger, and a $2.0 million decrease in contractor expense primarily due to decreased use of
contractors for corporate support services.
Amortization of Other Acquired Intangible Assets
Amortization of other acquired intangible assets consists of amortization of certain intangible assets acquired in connection
with business combinations, including customer relationships, distribution networks, trade names and non-compete agreements.
The following table sets forth amortization of other acquired intangible assets for the years ended January 31, 2015, 2014, and
2013:
(in thousands)
Amortization of other acquired intangible
assets
Year Ended January 31,
2014
2013
2015
% Change
2015 - 2014
2014 - 2013
$
45,163
$
24,662
$
24,442
83%
1%
Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Amortization of other acquired intangible assets
increased approximately $20.5 million, or 83%, from $24.7 million in the year ended January 31, 2014 to $45.2 million in the
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year ended January 31, 2015 primarily due to amortization associated with business combinations that closed during the year
ended January 31, 2015.
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Amortization of other acquired intangible assets did
not materially change in the year ended January 31, 2014 compared to the year ended January 31, 2013. Amortization
associated with business combinations that closed during the year ended January 31, 2014 was approximately $0.4 million,
which was offset by the impact of the strengthening of the foreign currencies in which some of our intangible assets are
denominated during the year ended January 31, 2014 relative to the year ended January 31, 2013.
Further discussion regarding our business combinations appears in Note 4, "Business Combinations" to our consolidated
financial statements included under Item 8 of this report.
Other Income (Expense), Net
The following table sets forth total other expense, net for the years ended January 31, 2015, 2014, and 2013:
(in thousands)
Interest income
Interest expense
Losses on early retirements of debt
Other income (expense):
Foreign currency (losses) gains
Gains (losses) on derivatives
Derecognition of indemnification asset
related to CTI Merger
Other, net
Total other income (expense)
Total other expense, net
* Percentage is not meaningful.
Year Ended January 31,
2014
2013
2015
$
1,070
(36,661)
(12,546)
$
963
(29,780)
(9,879)
531
(31,034)
—
% Change
2015 - 2014
11%
23%
27%
2014 - 2013
81%
(4)%
*
(13,402)
3,986
(6,057)
345
—
(155)
(9,571)
(57,708) $
(12,874)
(1,689)
(20,275)
(58,971) $
960
(399)
—
(1,847)
(1,286)
(31,789)
121%
*
*
(91)%
(53)%
(2)%
*
(186)%
*
(9)%
*
86%
$
$
Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Total other expense, net, decreased by $1.3 million
from $59.0 million in the year ended January 31, 2014 to $57.7 million in the year ended January 31, 2015.
During the year ended January 31, 2015, we recorded $12.5 million of losses upon early retirements of debt. Of this amount,
$7.1 million was recorded in connection with the early retirement of the March 2013 Term Loans (defined below), and $5.5
million was recorded in connection with the early retirement of $530.0 million of the February 2014 Term Loans and March
2014 Term Loans (defined below). Further discussion regarding our credit facilities appears in Note 6, “Long-term Debt” to our
consolidated financial statements included under Item 8 of this report.
Interest expense increased to $36.7 million in the year ended January 31, 2015 from $29.8 million in the year ended January 31,
2014 primarily due to incremental borrowings discussed in Note 6, “Long-term Debt” to our consolidated financial statements
included under Item 8 of this report.
We recorded $13.4 million of net foreign currency losses in the year ended January 31, 2015 compared to $6.1 million of net
losses in the year ended January 31, 2014. Foreign currency losses in the year ended January 31, 2015 resulted primarily from
(i) strengthening of the U.S. dollar against the British pound sterling, resulting in foreign currency losses on U.S. dollar-
denominated net liabilities in certain entities which use a British pound sterling functional currency, (ii) weakening of the euro
against the British pound sterling, resulting in foreign currency losses on euro-denominated net assets in certain entities which
use a British pound sterling functional currency, and (iii) strengthening of the U.S. dollar against the Singapore dollar, resulting
in foreign currency losses on Singapore dollar-denominated net assets in certain entities which use a U.S. dollar functional
currency. Of the $13.4 million of net foreign currency losses in the year ended January 31, 2015, $12.4 million were recorded
during the three months ended January 31, 2015.
In the year ended January 31, 2015, there were net gains on derivative financial instruments (not designated as hedging
instruments) of $4.0 million, compared to net gains of $0.3 million on such instruments for the year ended January 31, 2014.
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The higher net gains in the current year reflected gains on contracts executed to hedge movements in the exchange rate between
the U.S. dollar and the euro.
Other, net, expense decreased to $0.2 million in the year ended January 31, 2015 from $1.7 million in the year ended
January 31, 2014 due to the inclusion of a $1.1 million write-off of an indemnification asset associated with tax liabilities
recorded in connection with the CTI Merger in the year ended January 31, 2014, with no comparable expense in the year ended
January 31, 2015.
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Total other expense, net, increased by $27.2 million
from $31.8 million in the year ended January 31, 2013 to $59.0 million in the year ended January 31, 2014. During the year
ended January 31, 2014, we recorded $9.9 million of losses upon early retirements of debt, which primarily related to the early
retirement of the term loan under our prior credit agreement. There were no such losses recognized during the year ended
January 31, 2013. Further discussion regarding our credit facilities appears in Note 6, “Long-term Debt” to our consolidated
financial statements included under Item 8 of this report.
Interest expense decreased to $29.8 million in the year ended January 31, 2014 from $31.0 million in the year ended
January 31, 2013 primarily due to lower interest rates on borrowings under our Credit Agreement, resulting from a March 2013
amendment to the Credit Agreement. Further discussion regarding our credit facilities appears in Note 6, “Long-term Debt” to
our consolidated financial statements included under Item 8 of this report.
We recorded $6.1 million of net foreign currency losses in the year ended January 31, 2014 compared to $1.0 million of net
gains in the year ended January 31, 2013. Foreign currency losses in the year ended January 31, 2014 resulted primarily from
(i) strengthening of the U.S. dollar against the Singapore dollar, resulting in foreign currency losses on Singapore dollar-
denominated net assets in certain entities which use a U.S. dollar functional currency, (ii) weakening of the U.S. dollar against
the Israeli shekel, resulting in foreign currency losses on Israeli shekel-denominated net liabilities in certain entities which use a
U.S. dollar functional currency, (iii) weakening of the euro against the British pound sterling, resulting in foreign currency
losses on euro-denominated net assets in certain entities which use a British pound sterling functional currency, and (iv)
weakening of the Japanese yen against the U.S. dollar, resulting in foreign currency losses on U.S. dollar-denominated net
liabilities in certain entities which use a Japanese yen functional currency.
In the year ended January 31, 2014, we recorded a charge of $12.9 million for the derecognition of an indemnification asset
associated with the resolution of an uncertain tax position previously recorded in connection with the CTI Merger. At the
closing of the CTI Merger, we recorded indemnification assets in amounts corresponding to CTI’s liabilities for uncertain tax
positions, recognizing Comverse’s contractual obligation to indemnify us for these potential liabilities. If an uncertain tax
position liability is required to be subsequently reversed, the reversal is generally recorded as a reduction to the provision for
income taxes. The reversal of the corresponding indemnification asset is reflected within other income (expense), net.
Accordingly, the $12.9 million charge to other income (expense) was substantially offset by a reduction to our provision for
income taxes. Please refer also to the discussion under “(Benefit) Provision for Income Taxes”, below. Further information
regarding the CTI Merger appears in Note 15, “Merger with CTI” to our consolidated financial statements included under Item
8 of this report.
(Benefit) Provision for Income Taxes
The following table sets forth our (benefit) provision for income taxes for the years ended January 31, 2015, 2014, and 2013:
(in thousands)
(Benefit) provision for income taxes
* Percentage is not meaningful.
Year Ended January 31,
2014
2013
2015
$
(14,999) $
4,539
$
8,960
% Change
2015 - 2014
*
2014 - 2013
(49)%
Year Ended January 31, 2015 compared to Year Ended January 31, 2014. Our effective income tax rate was (70.1)% for the
year ended January 31, 2015, compared to 7.2% for the year ended January 31, 2014. For the year ended January 31, 2015, our
effective income tax rate was lower than the U.S. federal statutory income tax rate of 35% primarily due to the release of $44.4
million of Verint valuation allowances. We maintain valuation allowances on our net U.S. deferred income tax assets related to
federal and certain state jurisdictions. In connection with the acquisition of KANA on February 3, 2014, we recorded deferred
income tax liabilities primarily attributable to acquired intangible assets to the extent the amortization will not be deductible for
income tax purposes. Under accounting guidelines, because the amortization of the intangible assets in future periods provides
a source of taxable income, we expect to realize a portion of our existing deferred income tax assets. As such, we reduced the
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valuation allowance recorded on our deferred income tax assets to the extent of the deferred income tax liabilities recorded.
Because the valuation allowance related to existing Verint deferred income tax assets, the impact of the release was reflected as
a discrete income tax benefit and not as a component of the KANA acquisition accounting. The effective income tax rate was
also affected by the mix and levels of income and losses among taxing jurisdictions, changes in unrecognized income tax
benefits, and the recording of a valuation allowance on certain income tax attributes of a foreign subsidiary where we do not
expect to realize the benefits. Pre-tax income in our profitable jurisdictions, where we recorded income tax provisions at rates
lower than the U.S. federal statutory income tax rate, was substantially offset by our domestic losses where we maintain
valuation allowances and did not record the related income tax benefits. The result was an income tax benefit of $15.0 million
on $21.4 million of pre-tax income, resulting in an income tax benefit rate of 70.1%. For the year ended January 31, 2014, our
effective income tax rate was lower than the U.S. federal statutory income tax rate of 35% primarily due to the level and mix of
income and losses by jurisdiction and an income tax benefit of $12.4 million for the reversal of unrecognized tax benefits
established in connection with the CTI Merger. The recognition of the CTI income tax benefits resulted in a charge within
other income (expense), net due to the write-off of an indemnification asset. Pre-tax income in our profitable jurisdictions,
where we recorded income tax provisions at rates lower than the U.S. federal statutory income tax rate, was partially offset by
our domestic losses where we maintain valuation allowances and did not record the related income tax benefits. The result was
an income tax provision of $4.5 million on $63.3 million of pre-tax income, which represented an effective income tax rate of
7.2%.
Year Ended January 31, 2014 compared to Year Ended January 31, 2013. Our effective income tax rate was 7.2% for the year
ended January 31, 2014, compared to 13.2% for the year ended January 31, 2013. For the year ended January 31, 2014, our
effective income tax rate was lower than the U.S. federal statutory income tax rate of 35% primarily due to the mix and levels
of income and losses by jurisdiction and an income tax benefit of $12.4 million for the reversal of unrecognized tax benefits
established in connection with the CTI Merger. The recognition of the CTI tax benefits resulted in a charge within other income
(expense), net due to the write-off of an indemnification asset. Pre-tax income in our profitable jurisdictions, where we
recorded income tax provisions at rates lower than the U.S. federal statutory income tax rate, was partially offset by our
domestic losses where we maintain valuation allowances and did not record the related income tax benefits. The result was an
income tax provision of $4.5 million on $63.3 million of pre-tax income, resulting in an effective income tax rate of 7.2%. For
the year ended January 31, 2013, our effective income tax rate was lower than the U.S. federal statutory income tax rate of 35%
primarily due to the level and mix of income and losses by jurisdiction, partially offset by the write-off of certain income tax
attributes resulting from the merger of certain foreign subsidiaries, an increase in unrecognized income tax benefits and an
increase in the valuation allowance. Pre-tax income in our profitable jurisdictions, where we recorded income tax provisions at
rates lower than the U.S. federal statutory income tax rate, was partially offset by our domestic losses where we maintain
valuation allowances and did not record the related income tax benefits. The result was an income tax provision of $9.0 million
on $67.8 million of pre-tax income, which represented an effective income tax rate of 13.2%.
The comparison of our effective income tax rates between periods is significantly impacted by the level and mix of earnings
and losses by tax jurisdiction, foreign income tax rate differentials, amount of permanent book to tax differences, the impact of
unrecognized tax benefits, and the effects of valuation allowances on certain loss jurisdictions.
Backlog
The delivery cycles of most of our products are generally very short, ranging from days to several months, with the exception
of certain projects with multiple deliverables over longer periods of time. Therefore, we do not view backlog as a meaningful
indicator of future business activity and do not consider it a meaningful financial metric for evaluating our business.
Liquidity and Capital Resources
Overview
Our primary recurring source of cash is the collection of proceeds from the sale of products and services to our customers,
including cash periodically collected in advance of delivery or performance.
Our primary recurring use of cash is payment of our operating costs, which consist primarily of employee-related expenses,
such as compensation and benefits, as well as general operating expenses for marketing, facilities and overhead costs, and
capital expenditures. We also utilize cash for debt service under our Credit Agreement and our Notes, and periodically for
business acquisitions. Cash generated from operations, along with our existing cash, cash equivalents, and short-term
investments, are our primary sources of operating liquidity, and we believe that our operating liquidity is sufficient to support
our current business operations, including debt service and capital expenditure requirements.
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In February 2014, in connection with our acquisition of KANA, we borrowed $125.0 million under the revolving credit facility
under our Credit Agreement (the "2013 Revolving Credit Facility") and we also incurred $300.0 million of incremental term
loans under our Credit Agreement, both for purposes of funding a portion of the purchase price for KANA. In June 2014, we
completed concurrent public offerings of 5,750,000 shares of our common stock and $400.0 million in aggregate principal
amount of 1.50% convertible senior notes due June 1, 2021. The aggregate net proceeds from the concurrent offerings were
$657.5 million, after deducting underwriters’ discounts and commissions, but excluding other offering expenses. We used $15.6
million of the net proceeds to pay the net costs of an arrangement consisting of the purchase of call options and the sale of
warrants to purchase our common stock, the intent of which is to reduce the potential dilution to our common stock upon
conversion of the Notes. We used the majority of the remainder of the net proceeds to repay a portion of the outstanding
indebtedness under our Credit Agreement. Also in June 2014, we amended our Credit Agreement to increase the lending
commitments under our 2013 Revolving Credit Facility to $300.0 million and extended the facility's term by approximately six
months to September 6, 2018. Further discussion of our Credit Agreement, Notes, call options and warrants appears below,
under "Financing Arrangements".
We have historically expanded our business in part by investing in strategic growth initiatives, including acquisitions of
products, technologies, and businesses. We have used cash as consideration for substantially all of our historical business
acquisitions, including approximately $605 million of net cash expended for business acquisitions during the year ended
January 31, 2015, comprised primarily of the acquisition of KANA in February 2014 and UTX in April 2014. The acquisition
of KANA was funded through a combination of cash on hand, and as described above, incremental term loans and borrowings
under our 2013 Revolving Credit Facility.
We continually examine our options with respect to terms and sources of existing and future short-term and long-term capital
resources to enhance our operating results and to ensure that we retain financial flexibility, and may from time to time elect to
raise additional equity or debt capital in the capital markets.
A considerable portion of our operating income is earned outside the United States. Cash, cash equivalents, short-term
investments, and restricted cash and bank time deposits (including any long-term portions) held by our subsidiaries outside the
United States were $297.2 million and $268.6 million as of January 31, 2015 and 2014, respectively, and are generally used to
fund the subsidiaries’ operating requirements and to invest in company growth initiatives, including business acquisitions. Cash
on hand in the United States was utilized to fund a portion of the purchase price for KANA, and cash on hand outside of the
United States was utilized to fund the purchase price for UTX. We currently do not anticipate that we will need funds generated
from foreign operations to fund our domestic operations for the next 12 months and for the foreseeable future.
Should other circumstances arise whereby we require more capital in the United States than is generated by our domestic
operations, or should we otherwise consider it in our best interests, we could repatriate future earnings from foreign
jurisdictions, which could result in higher effective tax rates. If available, our NOLs, particularly those in the United States,
could reduce potential income tax liabilities that may result from repatriated earnings from foreign jurisdictions to the United
States. We generally have not provided for deferred income taxes on the excess of the amount for financial reporting over the
tax basis of investments in our foreign subsidiaries because we currently plan to indefinitely reinvest such earnings outside the
United States.
The following table sets forth our cash and cash equivalents, restricted cash and bank time deposits, short-term investments and
long-term debt as of January 31, 2015 and 2014:
(in thousands)
Cash and cash equivalents
Restricted cash and bank time deposits
Short-term investments
Long-term debt
January 31,
2015
2014
$
$
$
$
285,072
36,920
35,751
736,779
$
$
$
$
378,618
6,423
32,049
635,830
At January 31, 2015, our cash and cash equivalents totaled $285.1 million, a decrease of $93.5 million from $378.6 million at
January 31, 2014. Our February 2014 acquisition of KANA, which was partially financed with approximately $96.4 million of
cash on hand, including closing costs, and our March 2014 acquisition of UTX, which was entirely financed with $82.9 million
of cash on hand, significantly impacted our cash and cash equivalents during the year ended January 31, 2015.
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Our operating activities generated $193.7 million of cash during the year ended January 31, 2015, which was partially offset by
$281.1 million of net cash used in combined investing and financing activities during this period. Further discussion of these
items appears below.
Consolidated Cash Flow Activity
The following table summarizes selected items from our consolidated statements of cash flows for the years ended January 31,
2015, 2014 and 2013:
(in thousands)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Net Cash Provided by Operating Activities
$
$
$
Year Ended January 31,
2014
178,284
(64,196)
54,534
23
168,645
2015
193,725
(676,835)
395,713
(6,149)
(93,546) $
$
$
2013
123,385
(35,696)
(29,306)
928
59,311
Net cash provided by operating activities is driven primarily by our net income, adjusted for non-cash items, and working
capital changes. As our business grows and we generate higher revenue, we generally expect our operating cash flow to also
increase. Operating activities generated $193.7 million of net cash during the year ended January 31, 2015, compared to $178.3
million generated during the year ended January 31, 2014. Our operating results for the year ended January 31, 2015 included
$122.1 million of net non-cash expenses, compared to $97.3 million of net non-cash expenses in the prior year, so despite
reporting lower net income in the year ended January 31, 2015 compared to the prior year, our operating cash flow improved.
Operating activities generated $178.3 million of net cash during the year ended January 31, 2014, compared to $123.4 million
generated during the year ended January 31, 2013. The improved operating cash flow resulted primarily from our higher
operating income in the year ended January 31, 2014, which contributed to higher accounts receivable collections and customer
deposits, compared to the year ended January 31, 2013, and the impact of net income tax refunds of $1.7 million in the year
ended January 31, 2014, compared to net income tax payments of $18.2 million in the prior year. The net income tax refunds in
the year ended January 31, 2014 resulted principally from the impact of income tax refunds in Israel associated with prior
periods' income tax returns.
Net Cash Used in Investing Activities
During the year ended January 31, 2015, our investing activities used $676.8 million of net cash, the primary component of
which was $605.3 million of net cash utilized for business acquisitions, including the acquisitions of KANA in February 2014
and UTX in March 2014. We also had a $36.3 million increase in restricted cash and bank time deposits during this period.
Restricted cash and bank time deposits are typically short-term deposits used to secure bank guarantees in connection with
sales contracts, the amounts of which will fluctuate from period to period. The increase in restricted cash and bank time
deposits during the year ended January 31, 2015 reflected deposits associated with several large sales contracts. In addition, we
made $29.2 million of payments for property, equipment, and capitalized software development costs, and made $7.5 million of
net purchases of short-term investments, during the year.
During the year ended January 31, 2014, our investing activities used $64.2 million of net cash, the primary components of
which were $32.8 million of net cash utilized for business acquisitions, $22.4 million of payments for property, equipment, and
capitalized software development costs, and $18.9 million of net purchases of short-term investments. We expanded our short-
term investing activity during the year ended January 31, 2014 to increase returns on available funds provided by operating and
financing activities. Partially offsetting these uses was a $7.7 million decrease in restricted cash and bank time deposits.
For the year ended January 31, 2013, our investing activities used $35.7 million of net cash, primarily reflecting $20.0 million
of payments for property, equipment, and capitalized software development costs. We also purchased $13.6 million of short-
term investments during this year.
We had no significant commitments for capital expenditures at January 31, 2015.
Net Cash Provided by (Used in) Financing Activities
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For the year ended January 31, 2015, our financing activities provided $395.7 million of net cash. In connection with the
February 2014 acquisition of KANA, we incurred $300.0 million of incremental term loans and borrowed $125.0 million under
our 2013 Revolving Credit Facility. Additionally, in March 2014, we incurred $643.5 million of new term loans, the proceeds
of which were used to repay $643.5 million of prior term loans. In June 2014, we completed concurrent public offerings of
5,750,000 shares of our common stock, gross proceeds from which were $274.6 million, and $400.0 million in aggregate
principal amount of the Notes. We used $15.6 million of the net proceeds from these offerings to pay the net costs of an
arrangement consisting of the purchase of call options and the sale of warrants to purchase our common stock, the intent of
which is to reduce the potential dilution to our common stock upon conversion of the Notes. We used the majority of the
remainder of the net proceeds to retire $530.0 million of the February 2014 Term Loans and March 2014 Term Loans, and all
$106.0 million of then-outstanding borrowings under the 2013 Revolving Credit Facility. In connection with these various
financing activities, we paid $29.2 million of debt and equity issuance costs, including underwriting discounts and commissions
associated with the public offerings. Other financing activities during the year ended January 31, 2015 included payments of
$10.4 million for the financing portion of payments under contingent consideration arrangements related to prior business
combinations, and the receipt of $17.6 million of proceeds from exercises of stock options.
For the year ended January 31, 2014, our financing activities provided $54.5 million of net cash. During this period, we
borrowed $646.7 million under our Credit Agreement (consisting of gross borrowings of $650.0 million, reduced by a $3.3
million original issuance discount), repaid $576.0 million of outstanding borrowings under our Credit Agreement, and paid
$7.8 million of related debt issuance costs. We also received $10.4 million of cash in connection with the CTI Merger during
this year. Other financing activities during the year ended January 31, 2014 included payments of $16.1 million for the
financing portion of payments under contingent consideration arrangements related to prior business combinations, and the
receipt of $10.9 million of proceeds from exercises of stock options.
During the year ended January 31, 2013, our financing activities used $29.3 million of net cash, the primary use of which was
$22.0 million of repayments of borrowings, including an optional $15.0 million term loan payment. We also made payments of
$6.5 million for the financing portion of payments under contingent consideration arrangements related to prior business
combinations. These uses were partially offset by $2.6 million of proceeds from exercises of stock options.
Liquidity and Capital Resources Requirements
Based on past performance and current expectations, we believe that our cash, cash equivalents, short-term investments and
cash generated from operations will be sufficient to meet anticipated operating costs, required payments of principal and
interest, working capital needs, ordinary course capital expenditures, research and development spending, and other
commitments for at least the next 12 months. Currently, we have no plans to pay any cash dividends on our common stock,
which are not permitted under our Credit Agreement.
Our liquidity could be negatively impacted by a decrease in demand for our products and service and support, including the
impact of changes in customer buying behavior due to circumstances over which we have no control. If we determine to make
additional business acquisitions or otherwise require additional funds, we may need to raise additional capital, which could
involve the issuance of additional equity or debt securities.
Financing Arrangements
1.50% Convertible Senior Notes
On June 18, 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes due June 1, 2021,
unless earlier converted by the holders pursuant to their terms. The Notes pay interest in cash semiannually in arrears at a rate
of 1.50% per annum.
The Notes were issued concurrently with our issuance of 5,750,000 shares of common stock, the majority of the combined net
proceeds of which were used to partially repay certain indebtedness under our Credit Agreement, as further described below.
The Notes are unsecured and rank senior in right of payment to our indebtedness that is expressly subordinated in right of
payment to the Notes; equal in right of payment to our indebtedness that is not so subordinated; effectively subordinated in
right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and
structurally subordinated to indebtedness and other liabilities of our subsidiaries.
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The Notes are convertible into, at our election, cash, shares of common stock, or a combination of both, subject to satisfaction
of specified conditions and during specified periods, as described below. If converted, we currently intend to pay cash in
respect of the principal amount.
The conversion price of the Notes at any time is equal to $1,000 divided by the then-applicable conversion rate. The Notes have
an initial conversion rate of 15.5129 shares of common stock per $1,000 principal amount of Notes, which represents an initial
effective conversion price of approximately $64.46 per share of common stock and would result in the issuance of
approximately 6,205,000 shares if all of the Notes were converted. Throughout the term of the Notes, the conversion rate may
be adjusted upon the occurrence of certain events.
Holders may surrender their Notes for conversion at any time prior to the close of business on the business day immediately
preceding December 1, 2020, only under the following circumstances:
•
•
•
during any calendar quarter commencing after the calendar quarter ending on September 30, 2014, if the closing sale
price of our common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive
trading days ending on the last trading day of the immediately preceding calendar quarter, is more than 130% of the
conversion price of the Notes in effect on each applicable trading day;
during the ten consecutive trading-day period following any five consecutive trading-day period in which the trading
price for the Notes for each such trading day was less than 98% of the closing sale price of our common stock on such
date multiplied by the then-current conversion rate; or
upon the occurrence of specified corporate events, as described in the indenture governing the Notes, such as a
consolidation, merger, or binding share exchange.
On or after December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the
maturity date, holders may surrender their Notes for conversion regardless of whether any of the foregoing conditions have
been satisfied.
If we satisfy our conversion obligation in solely cash or a combination of cash and shares of common stock, the amount of cash
and shares of common stock, if any, due upon conversion will be based on a daily conversion value for each trading day in a 50
trading-day conversion period. Holders will not receive any additional cash payment or additional shares of common stock
representing accrued and unpaid interest, if any, upon conversion of a Note, except in limited circumstances. Instead, interest
will be deemed to be paid by the consideration delivered upon conversion of a Note.
The conversion rate for the Notes is subject to adjustment as described in the indenture governing the Notes. An adjustment to
the conversion rate will result in a corresponding (but inverse) adjustment to the conversion price.
If specified “make-whole adjustment events” occur, the conversion rate for any Notes converted in connection with such make-
whole adjustment event will, in specified circumstances, be increased by a number of additional shares of common stock. In
addition, holders may require us to purchase for cash all or any portion of their Notes upon the occurrence of a “fundamental
change” at a price equal to 100% of the principal amount of the Notes being purchased, plus accrued and unpaid interest to, but
excluding, the fundamental change purchase date.
As of January 31, 2015, the Notes were not convertible.
Note Hedges and Warrants
Concurrently with the issuance of the Notes, we entered into convertible note hedge transactions (the “Note Hedges”) and sold
warrants (the “Warrants”). The combination of the Note Hedges and the Warrants serves to increase the effective initial
conversion price for the Notes to $75.00 per share. The Note Hedges and Warrants are each separate instruments from the
Notes.
Note Hedges
Pursuant to the Note Hedges, we purchased call options on our common stock, under which we have the right to acquire from
the counterparties up to approximately 6,205,000 shares of our common stock, subject to customary anti-dilution adjustments,
at a price of $64.46, which equals the initial conversion price of the Notes. Our exercise rights under the Note Hedges generally
trigger upon conversion of the Notes and the Note Hedges terminate upon maturity of the Notes, or the first day the Notes are
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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, 2015, we had not purchased
any shares under the Note Hedges.
Warrants
We sold the Warrants to several counterparties. The Warrants provide the counterparties rights to acquire from us up to
approximately 6,205,000 shares of our common stock at a price of $75.00 per share. The Warrants expire incrementally on a
series of expiration dates beginning in August 2021. At expiration, if the market price per share of our common stock exceeds
the strike price of the Warrants, we will be obligated to issue shares of our common stock having a value equal to such excess.
The proceeds from the sale of the Warrants were $45.2 million and were recorded as additional paid-in capital. As of January
31, 2015, no Warrants had been exercised and all Warrants remained outstanding.
Credit Agreements
As of January 31, 2014, our Credit Agreement provided for $850.0 million of senior secured credit facilities, including $650.0
million of term loans maturing in September 2019 (the "March 2013 Term Loans"), of which $645.1 million was outstanding at
January 31, 2014, and a $200.0 million 2013 Revolving Credit Facility maturing in March 2018, under which there were no
borrowings at January 31, 2014. The credit facility was subject to a maximum increase of $300.0 million and reduction from
time to time.
As noted above, in February 2014, in connection with our acquisition of KANA, we borrowed $125.0 million under the 2013
Revolving Credit Facility and we also incurred $300.0 million under incremental term loans under an amendment to our Credit
Agreement (the "February 2014 Term Loans"), both for purposes of funding a portion of the purchase price for KANA.
In March 2014, we refinanced the $643.5 million of outstanding March 2013 Term Loans with the proceeds of new term loans
(the "March 2014 Term Loans"), primarily for purposes of reducing the interest rate on such loans. We also amended our Credit
Agreement in February and March 2014 to, among other things, (i) change the basis for determining the interest rate on
borrowings under the 2013 Revolving Credit Facility, (ii) increase the permitted amount of incremental term loans and
revolving credit commitments (beyond the incremental term loans borrowed in February 2014) by up to an aggregate of $200.0
million plus an additional amount such that our leverage ratio (as defined in the Credit Agreement) would not exceed a
specified maximum ratio, (iii) permit us to issue convertible indebtedness (as defined in the Credit Agreement), (iv) permit us
to refinance all or a portion of any existing term loans with replacement term loans, and (v) extend by one year, to January 31,
2016, the step-down date of the leverage ratio covenant applicable to the 2013 Revolving Credit Facility.
On June 18, 2014, we utilized the majority of the combined net proceeds from the issuance of the Notes and the concurrent
issuance of 5,750,000 shares of common stock to retire $530.0 million of the February 2014 Term Loans and March 2014 Term
Loans, and to repay all $106.0 million of then-outstanding borrowings under the 2013 Revolving Credit Facility.
Also in June 2014, we further amended our Credit Agreement to increase the lending commitments under our 2013 Revolving
Credit Facility to $300.0 million and extended the facility's term by approximately six months to September 6, 2018.
As of January 31, 2015, we had an aggregate $411.1 million of February 2014 Term Loans and March 2014 Term Loans
outstanding, bearing interest at an annual rate of 3.50%. Following the partial retirements of the term loans in June 2014, there
are no scheduled principal payments on the term loans until August 2016. The vast majority of the term loans are due upon
maturity in September 2019. There were no outstanding borrowings under the 2013 Revolving Credit Facility at January 31,
2015.
The 2013 Revolving Credit Facility contains a financial covenant that requires us to maintain a ratio of Consolidated Total Debt
to Consolidated EBITDA (each as defined in the Credit Agreement) of no greater than 5.00 to 1 until January 31, 2016 and no
greater than 4.50 to 1 thereafter (the "Leverage Ratio Covenant"). At January 31, 2015, our consolidated leverage ratio was
approximately 2.3 to 1 compared to a permitted consolidated leverage ratio of 5.00 to 1, and our EBITDA for the twelve-month
period then ended exceeded by at least $140.0 million the minimum EBITDA required to satisfy the Leverage Ratio Covenant
given our outstanding debt as of such date.
Obligations under our Credit Agreement are guaranteed by substantially all of our domestic subsidiaries and certain foreign
subsidiaries that have elected to be disregarded for U.S. tax purposes, and are secured by security interests in substantially all of
our and their assets, subject to certain exceptions detailed in the Credit Agreement and related ancillary documents.
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Our Credit Agreement provides for certain customary events of default with corresponding grace periods. These events of
default include failure to pay principal or interest when due under the Credit Agreement, failure to comply with covenants, any
representation or warranty made by us proving to be inaccurate in any material respect, defaults under certain other
indebtedness of ours or our subsidiaries, the occurrence of a Change of Control (as defined in the Credit Agreement) with
respect to us and certain insolvency or receivership events affecting us or our significant subsidiaries. Upon the occurrence of
an event of default resulting from a violation of the Leverage Ratio Covenant, the lenders under our 2013 Revolving Credit
Facility may require us to immediately repay outstanding borrowings under the facility and may terminate their commitments
to provide loans under the facility. A violation of the Leverage Ratio Covenant would not, by itself, result in an event of default
under the February 2014 Term Loans or March 2014 Term Loans, but may trigger a cross-default under the term loans in the
event we are required to repay outstanding borrowings under the 2013 Revolving Credit Facility. Upon the occurrence of other
events of default, the lenders may require us to immediately repay all outstanding borrowings under the Credit Agreement and
the lenders under our 2013 Revolving Credit Facility may terminate their commitments to provide loans under the facility.
Contractual Obligations
At January 31, 2015, our contractual obligations were as follows:
(in thousands)
Long-term debt obligations, including interest
Operating lease obligations
Purchase obligations
Other long-term obligations
Total contractual obligations
$
Total
920,147
85,081
57,534
951
$ 1,063,713
$
$
Payments Due by Period
1-3 years
< 1 year
3-5 years
> 5 years
20,621
15,383
53,722
304
90,030
$
$
47,388
22,728
3,812
313
74,241
$
$
443,138
15,017
—
94
458,249
$
$
409,000
31,953
—
240
441,193
The long-term debt obligations reflected above include projected interest payments over the term of our outstanding debt as of
January 31, 2015, assuming interest rates in effect for our term loan borrowings as of January 31, 2015.
Operating lease obligations reflected above exclude future sublease income from certain space we have subleased to third
parties. As of January 31, 2015, total expected future sublease income was $2.5 million and will range from $0.1 million to
$1.1 million on an annual basis through August 2018.
On February 13, 2015, we entered into a new operating lease for a facility in Melville, New York, which we expect to occupy
on or about November 1, 2015. The new Melville facility will serve as our corporate headquarters following the expiration of
our existing corporate headquarters lease in November 2015. The aggregate minimum lease commitment over the term of this
new lease, excluding operating expenses, is approximately $18.8 million. This operating lease commitment is not reflected in
the table above.
Our purchase obligations are associated with agreements for purchases of goods or services generally including agreements that
are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be
purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transactions. Agreements to
purchase goods or services that have cancellation provisions with no penalties are excluded from these purchase obligations.
Our consolidated balance sheet at January 31, 2015 included $50.2 million of non-current tax reserves, net of related benefits
(including interest and penalties of $10.9 million) for uncertain tax positions. However, these amounts are not included in the
table above because it is not possible to predict or estimate the timing of payments for these obligations. We do not expect to
make any significant payments for these uncertain tax positions within the next 12 months.
Contingent Payments Associated with Business Combinations
In connection with certain of our business combinations, we have agreed to make contingent cash payments to the former
owners of the acquired companies based upon achievement of performance targets following the acquisition dates.
For the year ended January 31, 2015, we made $12.0 million of payments under contingent consideration arrangements. As of
January 31, 2015, potential future cash payments and earned consideration expected to be paid subsequent to January 31, 2015
under contingent consideration arrangements total $32.9 million, the estimated fair value of which was $14.5 million, including
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$3.9 million reported in accrued expenses and other current liabilities, and $10.6 million reported in other liabilities. The
performance periods associated with these potential payments extend through January 2019.
Off-Balance Sheet Arrangements
As of January 31, 2015, we did not have any off-balance sheet arrangements that we believe have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of
operations, liquidity, capital expenditures or capital resources that are material to investors.
Recent Accounting Pronouncements
New Accounting Pronouncements Implemented
In March 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon
Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This
new standard is intended to resolve diversity in practice regarding the release into net income of a cumulative translation
adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. ASU No. 2013-05 was effective
prospectively for us on February 1, 2014. The adoption of this standard did not impact our consolidated financial statements.
New Accounting Pronouncements To Be Implemented?
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and
Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU
No. 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both
discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It was effective
for us on February 1, 2015. We do not expect the adoption of this standard to materially impact our consolidated financial
statements, absent any disposals of components or groups of components that have a material effect on our financial results in
future periods.?
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09
supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue
recognition guidance throughout the Industry Topics of the Accounting Standards Codification. Additionally, this update
supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type
Contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. It is effective for the first interim period within annual reporting periods beginning after
December 15, 2016, and early adoption is not permitted. Entities may choose from two adoption methods, with certain practical
expedients. We are currently reviewing this standard to assess the impact on our future consolidated financial statements and
evaluating the available adoption methods.?
In June 2014, the FASB issued ASU No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial
Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. ASU No.
2014-10 removes the financial reporting distinction between development stage entities and other reporting entities from GAAP
and it eliminates an exception provided in the consolidation guidance for development stage enterprises. It is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2015, although early adoption is permitted. We are
currently reviewing this standard to assess the impact on our future consolidated financial statements.?
In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-
Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite
Service Period, which requires that a performance target that affects vesting, and that could be achieved after the requisite
service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the
grant date fair value of the award. ASU No. 2014-12 is effective for annual reporting periods beginning after December 15,
2015, including interim periods within that reporting period, although early adoption is permitted. We are currently reviewing
this standard to assess the impact on our future consolidated financial statements.?
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU defines management’s
responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and
54
to provide related footnote disclosures. The provisions of ASU No. 2014-15 are effective for annual periods ending after
December 15, 2016 and for annual and interim periods thereafter, and early adoption is permitted. The adoption of ASU No.
2014-15 is not expected to have a material effect on our future consolidated financial statements.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20):
Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU No. 2015-01 eliminates
the concept of an extraordinary item from GAAP. As a result, an entity will no longer be required to separately present an
extraordinary item on its statement of operations, net of tax, after income from continuing operations or to disclose income
taxes and net income per share data applicable to an extraordinary item. However, ASU No. 2015-01 will still retain the
presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU No. 2015-01 is effective
for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period,
although early adoption is permitted. We do not expect the adoption of this standard to materially impact our consolidated
financial statements, absent any material transactions in future periods that would have qualified for extraordinary item
presentation under the prior guidance.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial condition due to adverse changes in financial market prices
and rates. We are exposed to market risk related to changes in interest rates and foreign currency exchange rate fluctuations. To
manage the volatility relating to interest rate and foreign currency risks, we periodically enter into derivative instruments
including foreign currency forward exchange contracts and interest rate swap agreements. It is our policy to enter into
derivative transactions only to the extent considered necessary to meet our risk management objectives. We use derivative
instruments solely to reduce the financial impact of these risks and do not use derivative instruments for speculative purposes.
Interest Rate Risk on Our Debt
In June 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes due June 1, 2021.
Holders may convert the Notes prior to maturity upon the occurrence of certain conditions. Upon conversion, we would be
required to pay the holders, at our election, cash, shares of common stock, or a combination of both. Concurrent with the
issuance of the Notes, we entered into the Note Hedges and sold the Warrants. These separate transactions were completed to
reduce our exposure to potential dilution upon conversion of the Notes.
The Notes have a fixed annual interest rate of 1.50% and therefore do not have interest rate exposure. However, the fair values
of the Notes are subject to interest rate risk, market risk and other factors due to the convertible feature. The fair values of the
Notes are also affected by our common stock price. Generally, the fair values of Notes will increase as interest rates fall and/or
our common stock price increases, and decrease as interest rates rise and/or our common stock price decreases. Changes in the
fair values of the Notes do not impact our financial position, cash flows, or results of operations due to the fixed nature of the
debt obligations. We do not carry the Notes at fair value, but we report the fair value of the Notes for disclosure purposes.
As of January 31, 2015, we have $411.1 million of outstanding term loan borrowings maturing in September 2019 under our
Credit Agreement, which also includes a $300.0 million revolving credit facility maturing in September 2018, under which
there were no outstanding borrowings at January 31, 2015. Borrowings under the Credit Agreement bear interest, payable
quarterly or, in the case of Eurodollar loans with an interest period of three months or less, at the end of the applicable interest
period, at a per annum rate of, at our election:
•
•
in the case of Eurodollar loans, the Adjusted LIBO Rate plus 2.75%. The Adjusted LIBO Rate is the greater of (i)
0.75% per annum and (ii) the product of (x) the LIBO Rate and (y) Statutory Reserves (both as defined in the Credit
Agreement), and
in the case of Base Rate loans, the Base Rate plus 1.75%. The Base Rate is the greatest of (i) the administrative
agent’s prime rate, (ii) the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.50% and (iii) the
Adjusted LIBO Rate for a one-month interest period plus 1.00%.
As of January 31, 2015, the interest rate on our term loan borrowings was 3.50%.
Because the interest rates applicable to borrowings under our Credit Agreement are variable, we are exposed to market risk
from changes in the underlying index rates, which affect our cost of borrowing. The periodic interest rates on borrowings under
the Credit Agreement are currently a function of several factors, the most important of which is the LIBO Rate. However,
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borrowings are subject to either a 0.75% (Eurodollar loans) or 1.00% (Base Rate loans) LIBO Rate floor in the interest rate
calculation, which currently reduces the likelihood of increases in the periodic interest rate, because current short-term LIBO
Rates are below 0.75%, and accordingly changes in short-term LIBO Rates will not impact the calculation unless those rates
increase above the interest rate floors. Based upon our borrowings as of January 31, 2015, for each 1.00% increase in the
applicable LIBO Rate above the interest rate floor, our annual interest payments would increase by approximately $4.2 million.
Previously, we utilized a pay-fixed/receive-variable interest rate swap agreement to partially mitigate the variable interest rate
risk associated with a prior credit agreement. We may consider utilizing interest rate swap agreements, or other agreements
intended to mitigate variable interest rate risk, in the future.
Interest Rate Risk on Our Investments
We invest in cash, cash equivalents, bank time deposits and marketable debt securities. Interest rate changes could result in an
increase or decrease in interest income we generate from these interest-bearing assets. Our cash, cash equivalents, and bank
time deposits are primarily maintained at high credit-quality financial institutions around the world, and our marketable debt
investments are restricted to highly rated corporate debt securities. We have not invested in marketable debt securities with
remaining maturities in excess of twelve months or in equity securities during the three-year period ended January 31, 2015.
The primary objective of our investment activities is the preservation of principal while maximizing investment income and
minimizing risk. We have investment guidelines relative to diversification and maturities designed to maintain safety and
liquidity.
As of January 31, 2015 and 2014, we had cash and cash equivalents totaling approximately $285.1 million and $378.6 million,
respectively, consisting of demand deposits, bank time deposits with maturities of 90 days or less, money market accounts, and
marketable debt securities with remaining maturities of 90 days or less. At such dates we also held $36.9 million and $6.4
million, respectively, of cash equivalents which were restricted and were not available for general operating use. These
balances primarily represent short-term deposits to secure bank guarantees in connection with sales contracts. The amounts of
these deposits can vary depending upon the terms of the underlying contracts. We also had short-term investments of $35.8
million and $32.0 million at January 31, 2015 and 2014, respectively, consisting of bank time deposits and marketable debt
securities of corporations, all with remaining maturities in excess of 90 days, but less than one year, at the time of purchase.
To provide a meaningful assessment of the interest rate risk associated with our investment portfolio, we performed a
sensitivity analysis to determine the impact a change in interest rates would have on the value of the investment portfolio
assuming, during the year ending January 31, 2016, average short-term interest rates increase or decrease by 50 basis points
relative to average rates realized during the year ended January 31, 2015. Such a change would cause our projected interest
income from cash, cash equivalents, restricted cash and bank time deposits, and short-term investments to increase or decrease
by approximately $1.8 million, assuming a similar level of investments in the year ending January 31, 2016 as in the year
ended January 31, 2015.
Due to the short-term nature of our cash and cash equivalents, time deposits, money market accounts and marketable debt
securities, their carrying values approximate their market values and are not generally subject to price risk due to fluctuations in
interest rates.
Foreign Currency Exchange Risk
The functional currency for most of our foreign subsidiaries is the applicable local currency, although we have several
subsidiaries with functional currencies that differ from their local currency, of which the most notable exceptions are our
subsidiaries in Israel, whose functional currencies are the U.S. dollar. We are exposed to foreign exchange rate fluctuations as
we convert the financial statements of our foreign subsidiaries into U.S. dollars for consolidated reporting purposes. If there are
changes in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars
results in a gain or loss which is recorded as a component of accumulated other comprehensive income (loss) within
stockholders’ equity.
While more than half of our revenue is denominated in U.S. dollars, approximately 50% of our operating expenses, primarily
labor expenses, are denominated in the local currencies where our foreign operations are located, primarily Israel, the United
Kingdom, Germany, certain other European countries whose functional currency is the euro, Australia, Canada, and Singapore.
We also generate some portion of our revenue in foreign currencies, mainly the British pound sterling, euro, Singapore dollar,
and Australian dollar. As a result, our consolidated U.S. dollar operating results are subject to the potentially material adverse
impact of fluctuations in foreign currency exchange rates between the U.S. dollar and the other currencies in which we transact.
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In addition, we have certain monetary assets and liabilities that are denominated in currencies other than the respective entity’s
functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that result in
gains or losses. We recorded net foreign currency losses of $13.4 million and $6.1 million for the years ended January 31, 2015
and 2014, respectively, and net foreign currency gains of $1.0 million for the year ended January 31, 2013, which are recorded
in other expense, net.
From time to time, we enter into foreign currency forward contracts in an effort to reduce the volatility of cash flows primarily
related to forecasted payroll and payroll-related expenses denominated in Israeli shekels and Canadian dollars. These contracts
are generally limited to durations of approximately 12 months or less. Our 50% owned joint venture in Singapore enters into
foreign currency forward contracts in an effort to reduce the volatility of cash flows primarily related to forecasted U.S. dollar
payments to its suppliers. These contracts are generally limited to durations of approximately 12 months or less. We have also
periodically entered into foreign currency forward contracts to manage exposures resulting from forecasted customer
collections denominated in currencies other than the respective entity’s functional currency and exposures from cash, cash
equivalents and short-term investments denominated in currencies other than the applicable functional currency.
During the years ended January 31, 2015 and 2014, we recorded net gains of $4.0 million and $0.3 million, respectively, on
foreign currency forward contracts not designated as hedges for accounting purposes, and net losses on such contracts of $0.4
million for the year ended January 31, 2013. We had $8.8 million of net unrealized losses on outstanding foreign currency
forward contracts as of January 31, 2015, with notional amounts totaling $156.8 million. We had $1.6 million of net unrealized
gains on outstanding foreign currency forward contracts as of January 31, 2014, with notional amounts totaling $127.6 million.
A sensitivity analysis was performed on all of our foreign exchange derivatives as of January 31, 2015. This sensitivity analysis
was based on a modeling technique that measures the hypothetical market value resulting from a 10% shift in the value of
exchange rates relative to the U.S. dollar, and assumes no changes in interest rates. A 10% increase in the relative value of the
U.S. dollar would decrease the estimated fair value of our foreign exchange derivatives by approximately $8.1 million.
Conversely, a 10% decrease in the relative value of the U.S. dollar would increase the estimated the fair value of these financial
instruments by approximately $9.9 million.
The counterparties to these foreign currency forward contracts are multinational commercial banks. While we believe the risk
of counterparty nonperformance is not material, past disruptions in the global financial markets have impacted some of the
financial institutions with which we do business. A sustained decline in the financial stability of financial institutions as a result
of disruption in the financial markets could affect our ability to secure creditworthy counterparties for our foreign currency
hedging programs.
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Item 8. Financial Statements and Supplementary Data
VERINT SYSTEMS INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of January 31, 2015 and 2014
Consolidated Statements of Operations for the Years Ended January 31, 2015, 2014, and 2013
Consolidated Statements of Comprehensive (Loss) Income for the Years Ended January 31, 2015, 2014, and 2013
Consolidated Statements of Stockholders’ Equity for the Years Ended January 31, 2015, 2014, and 2013
Consolidated Statements of Cash Flows for the Years Ended January 31, 2015, 2014, and 2013
Notes to Consolidated Financial Statements
Page
59
60
61
62
63
64
65
58
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Verint Systems Inc.
Melville, New York
We have audited the accompanying consolidated balance sheets of Verint Systems Inc. and subsidiaries (the "Company") as of
January 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive (loss) income, stockholders’
equity, and cash flows for each of the three years in the period ended January 31, 2015. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Verint
Systems Inc. and subsidiaries as of January 31, 2015 and 2014, and the results of their operations and their cash flows for each
of the three years in the period ended January 31, 2015, in conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company’s internal control over financial reporting as of January 31, 2015, based on the criteria established in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 27, 2015 expressed an unqualified opinion on the Company’s internal control over financial
reporting.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 27, 2015
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Table of Contents
VERINT SYSTEMS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share data)
Assets
Current Assets:
Cash and cash equivalents
Restricted cash and bank time deposits
Short-term investments
Accounts receivable, net of allowance for doubtful accounts of $1.1 million and $1.2 million,
respectively
Inventories
Deferred cost of revenue
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Goodwill
Intangible assets, net
Capitalized software development costs, net
Long-term deferred cost of revenue
Long-term deferred income taxes
Other assets
Total assets
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable
Accrued expenses and other current liabilities
Current maturities of long-term debt
Deferred revenue
Deferred income taxes
Total current liabilities
Long-term debt
Long-term deferred revenue
Long-term deferred income taxes
Other liabilities
Total liabilities
Commitments and Contingencies
Stockholders' Equity:
Preferred stock - $0.001 par value; authorized 2,207,000 shares at January 31, 2015 and 2014,
respectively; none issued.
Common stock - $0.001 par value; authorized 120,000,000 shares. Issued 61,253,000 and 53,907,000
shares; outstanding 60,905,000 and 53,605,000 shares at January 31, 2015 and 2014, respectively.
Additional paid-in capital
Treasury stock, at cost - 348,000 and 302,000 shares at January 31, 2015 and 2014, respectively.
Accumulated deficit
Accumulated other comprehensive loss
Total Verint Systems Inc. stockholders' equity
Noncontrolling interest
Total stockholders' equity
Total liabilities and stockholders' equity
See notes to consolidated financial statements.
60
January 31,
2015
2014
$
285,072
36,920
35,751
262,092
17,505
6,722
11,176
54,954
710,192
62,490
1,200,817
311,894
10,112
14,555
10,778
30,158
2,350,996
72,885
221,613
23
181,259
2,108
477,888
736,779
20,544
30,664
80,218
1,346,093
$
$
378,618
6,423
32,049
194,312
10,693
10,818
9,002
52,476
694,391
40,145
853,389
132,847
8,483
9,843
9,783
24,026
1,772,907
65,656
178,674
6,555
162,124
474
413,483
635,830
13,661
13,358
63,457
1,139,789
—
—
61
1,321,455
(10,251)
(219,074)
(94,335)
997,856
7,047
1,004,903
2,350,996
$
54
924,663
(8,013)
(250,005)
(39,725)
626,974
6,144
633,118
1,772,907
$
$
$
$
Table of Contents
VERINT SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
Revenue:
Product
Service and support
Total revenue
Cost of revenue:
Product
Service and support
Amortization of acquired technology and backlog
Total cost of revenue
Gross profit
Operating expenses:
Research and development, net
Selling, general and administrative
Amortization of other acquired intangible assets
Total operating expenses
Operating income
Other income (expense), net:
Interest income
Interest expense
Losses on early retirements of debt
Other expense, net
Total other expense, net
Income before (benefit) provision for income taxes
(Benefit) provision for income taxes
Net income
Net income attributable to noncontrolling interest
Net income attributable to Verint Systems Inc.
Dividends on preferred stock
Net income attributable to Verint Systems Inc. common shares
Net income per common share attributable to Verint Systems Inc.:
Basic
Diluted
Weighted-average common shares outstanding:
Basic
Diluted
See notes to consolidated financial statements.
Year Ended January 31,
2014
2013
2015
$
$
487,617
640,819
1,128,436
$
416,478
490,814
907,292
144,870
239,274
31,004
415,148
713,288
173,748
415,266
45,163
634,177
79,111
1,070
(36,661)
(12,546)
(9,571)
(57,708)
21,403
(14,999)
36,402
5,471
30,931
—
30,931
0.53
0.52
58,096
59,374
$
$
$
137,558
156,593
12,269
306,420
600,872
126,539
327,385
24,662
478,586
122,286
963
(29,780)
(9,879)
(20,275)
(58,971)
63,315
4,539
58,776
5,019
53,757
(174)
53,583
1.01
0.99
52,967
53,878
$
$
$
$
$
$
389,787
449,755
839,542
121,748
145,444
14,812
282,004
557,538
115,906
317,637
24,442
457,985
99,553
531
(31,034)
—
(1,286)
(31,789)
67,764
8,960
58,804
4,802
54,002
(15,472)
38,530
0.97
0.96
39,748
40,312
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Table of Contents
VERINT SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive (Loss) Income
(in thousands)
Net income
Other comprehensive income (loss), net of reclassification adjustments:
Foreign currency translation adjustments
Net unrealized gains on available-for-sale securities
Net unrealized (losses) gains on derivative financial instruments designated as
hedges
Benefit (provision) for income taxes on net unrealized (losses) gains on
derivative financial instruments designated as hedges
Other comprehensive (loss) income
Comprehensive (loss) income
Comprehensive income attributable to noncontrolling interest
Comprehensive (loss) income attributable to Verint Systems Inc.
See notes to consolidated financial statements.
Year Ended January 31,
2014
2013
2015
$
36,402
$
58,776
$
58,804
(45,600)
92
(10,547)
1,070
(54,985)
(18,583)
5,096
(23,679) $
5,283
9
(1,227)
265
4,330
63,106
4,849
58,257
$
2,002
—
1,993
(212)
3,783
62,587
5,074
57,513
$
62
VERINT SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
Verint Systems Inc. Stockholders’ Equity
(in thousands)
Common Stock
Shares
Par
Value
Additional
Paid-in
Capital
Treasury
Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total Verint
Systems Inc.
Stockholders'
Equity
Non-
controlling
Interest
Total
Stockholders'
Equity
Balances as of January 31, 2012
38,982
$ 40
$ 554,351
$ (7,466) $ (357,764) $
(47,736) $
141,425
$
Net income
Other comprehensive income
Stock-based compensation -
equity portion
Exercises of stock options
Common stock issued for stock
awards and stock bonuses
Purchases of treasury stock
Treasury stock retired
Dividends to noncontrolling
interest
Tax effects from stock award
plans
—
—
—
121
1,076
(21)
—
—
—
Balances as of January 31, 2013
40,158
Net income
Other comprehensive income
(loss)
Stock-based compensation -
equity portion
Exercises of stock options
Common stock issued for stock
awards and stock bonuses
—
—
—
384
789
Common stock issued for CTI
Merger, net
12,274
Dividends to noncontrolling
interest
Tax effects from stock award
plans
—
—
Balances as of January 31, 2014
53,605
Net income
Other comprehensive loss
Common stock issued in public
offering, net of issuance costs
Equity component of convertible
notes, net of issuance costs
Purchase of convertible note
hedges
Issuance of warrants
Stock-based compensation -
equity portion
Exercises of stock options
Common stock issued for stock
awards and stock bonuses
Purchases of treasury stock
Dividends to noncontrolling
interest
Tax effects from stock award
plans
—
—
5,750
—
—
—
—
505
1,091
(46)
—
—
—
—
—
—
—
—
—
—
—
40
—
—
—
—
1
13
—
—
54
—
—
6
—
—
—
—
—
1
—
—
—
—
—
20,174
2,222
4,073
—
(68)
—
10
—
—
—
—
—
(615)
68
—
—
54,002
—
—
—
—
—
—
—
—
—
3,511
—
—
—
—
—
—
—
580,762
(8,013)
(303,762)
(44,225)
53,757
—
54,002
3,511
20,174
2,222
4,073
(615)
—
—
10
224,802
53,757
2,870
4,802
272
—
—
—
—
—
$
144,295
58,804
3,783
20,174
2,222
4,073
(615)
—
(3,070)
(3,070)
—
4,874
5,019
10
229,676
58,776
924,663
(8,013)
(250,005)
(39,725)
30,931
—
(54,610)
(54,610)
—
—
30,471
10,982
2,837
299,626
—
(15)
—
—
—
—
—
—
—
—
—
—
264,927
78,209
(60,800)
45,188
46,963
17,520
4,531
—
—
254
—
—
—
—
—
—
—
—
—
(2,238)
—
—
—
—
—
—
—
—
—
4,500
4,500
(170)
4,330
—
—
—
—
—
—
30,471
10,982
2,838
299,639
—
—
—
—
30,471
10,982
2,838
299,639
—
(3,579)
(3,579)
(15)
—
(15)
626,974
30,931
264,933
78,209
(60,800)
45,188
46,963
17,520
4,532
(2,238)
6,144
5,471
(375)
—
—
—
—
—
—
—
—
633,118
36,402
(54,985)
264,933
78,209
(60,800)
45,188
46,963
17,520
4,532
(2,238)
—
(4,193)
(4,193)
254
—
254
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Balances as of January 31, 2015
60,905
$ 61
$1,321,455
$(10,251) $ (219,074) $
(94,335) $
997,856
$
7,047
$ 1,004,903
See notes to consolidated financial statements.
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VERINT SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Provision for doubtful accounts
Stock-based compensation - equity portion
Amortization of discount on convertible notes
(Benefit) provision for deferred income taxes
Excess tax benefits from stock award plans
Non-cash (gains) losses on derivative financial instruments, net
Losses on early retirements of debt
Other non-cash items, net
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable
Inventories
Deferred cost of revenue
Prepaid expenses and other assets
Accounts payable and accrued expenses
Deferred revenue
Other liabilities
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Cash paid for business combinations, including adjustments, net of cash acquired
Purchases of property and equipment
Purchases of investments
Sales and maturities of investments
Settlements of derivative financial instruments not designated as hedges
Cash paid for capitalized software development costs
Change in restricted cash and bank time deposits, including long-term portion
Other investing activities
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from borrowings, net of original issuance discount
Repayments of borrowings and other financing obligations
Proceeds from public issuance of common stock
Proceeds from issuance of warrants
Payments for convertible note hedges
Payments of debt issuance and other debt-related costs
Proceeds from exercises of stock options
Cash received in CTI Merger
Dividends paid to noncontrolling interest
Purchases of treasury stock
Excess tax benefits from stock award plans
Payments of contingent consideration for business combinations (financing portion)
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
See notes to consolidated financial statements.
64
Year Ended January 31,
2014
2013
2015
$
36,402
$
58,776
$
58,804
99,464
423
46,312
6,014
(47,331)
(298)
(3,986)
12,546
8,928
(54,921)
(4,223)
(677)
21,412
41,414
24,057
8,356
(167)
193,725
(605,279)
(23,134)
(21,175)
13,653
3,858
(6,083)
(36,291)
(2,384)
(676,835)
1,526,750
(1,361,852)
274,563
45,188
(60,800)
(29,164)
17,606
—
(4,193)
(2,238)
298
(10,445)
395,713
(6,149)
(93,546)
378,618
285,072
$
$
55,968
1,112
30,173
—
2,553
(64)
(346)
9,879
(1,964)
(23,387)
3,105
(6,148)
33,487
23,444
(1,994)
(6,513)
203
178,284
(32,767)
(15,725)
(197,749)
178,820
(359)
(6,668)
7,677
2,575
(64,196)
646,750
(586,126)
—
—
—
(7,754)
10,896
10,370
(3,579)
—
64
(16,087)
54,534
23
168,645
209,973
378,618
$
57,097
734
21,004
—
328
(139)
399
—
(5,297)
(13,809)
(1,957)
11,421
(17,577)
(598)
(6,104)
19,078
1
123,385
(660)
(16,045)
(13,593)
—
(270)
(3,916)
(1,212)
—
(35,696)
384
(22,035)
—
—
—
(217)
2,605
—
(3,070)
(615)
139
(6,497)
(29,306)
928
59,311
150,662
209,973
Table of Contents
VERINT SYSTEMS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. Actionable Intelligence is a necessity in a dynamic world of
massive information growth because it empowers organizations with crucial insights and enables decision makers to anticipate,
respond, and take action. With Verint solutions and value-added services, organizations of all sizes and across many industries
can make more timely and effective decisions. Today, more than 10,000 organizations in over 180 countries, including over 80
percent of the Fortune 100, use Verint solutions to improve enterprise performance and make the world a safer place. Verint’s
vision is to create A Smarter World with Actionable Intelligence®.
Our Actionable Intelligence solutions help organizations address three important challenges: Customer Engagement
Optimization; Security Intelligence; and Fraud, Risk, and Compliance. We help our customers capture large amounts of
information from numerous data types and sources, use analytics to glean insights from the information, and leverage the
resulting Actionable Intelligence to help achieve their customer engagement, enhanced security, and risk mitigation goals.?
Headquartered in Melville, New York, we support our customers around the globe directly and with an extensive network of
selling and support partners.
Significant Change in Ownership
For the periods presented in these consolidated financial statements through and including January 31, 2013, Comverse
Technology, Inc. ("CTI"), beneficially owned a majority of our common stock (assuming the conversion of CTI’s preferred
stock holdings into common stock) and held a majority of the voting power of our common stock. On February 4, 2013, CTI
was merged with and into our new, wholly owned subsidiary, eliminating CTI's majority ownership and control of us (the "CTI
Merger"). Further details are provided in Note 15, "Merger with CTI".
During the year ended January 31, 2013, CTI did not provide us with material levels of corporate or administrative services.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Verint Systems Inc., our wholly owned
subsidiaries, and a joint venture in which we hold a 50% equity interest. This joint venture functions as a systems integrator for
Asian markets and is a variable interest entity in which we are the primary beneficiary. The noncontrolling interest in this joint
venture is reflected within stockholders’ equity on our consolidated balance sheet, but separately from our equity. Investments
in companies in which we have less than a 20% ownership interest and do not exercise significant influence are accounted for
at cost. 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.
Cash and Cash Equivalents
Cash primarily consists of cash on hand and bank deposits. Cash equivalents primarily consist of interest-bearing money
market accounts, commercial paper, and other highly liquid investments with remaining maturities of 90 days or less when
purchased.
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Restricted Cash and Restricted Bank Time Deposits
Restricted cash 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. Restricted bank time
deposits generally consist of certificates of deposit with original maturities of between 30 and 360 days.
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 do not
invest in auction rate securities as a matter of policy.
Investments in marketable securities which are classified as available-for-sale are stated at fair value based on market quotes.
Investments in time deposits and in certain marketable debt securities which are classified as held-to-maturity are stated at
amortized cost. Occasionally, investments with stated maturities beyond one year are classified as short-term if the securities
are highly marketable and readily convertible into cash for current operations, although we held no such securities at January
31, 2015 and 2014. Unrealized gains and losses on available-for-sale securities, net of applicable deferred income taxes, are
recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Gains or losses realized
upon sale of short-term investments and declines in value deemed to be other than temporary, if applicable, are recorded in
other income (expense), net in our consolidated statement of operations, using the specific identification method. Interest on
short-term investments is recognized within income when earned.
We periodically review our investments for indications of possible impairment in value. Factors considered in determining
whether a loss is other than temporary include the length of time and extent to which fair value has been below the cost basis,
the financial condition and near-term prospects of the investee, and our intent and ability to hold the investment for a period of
time sufficient to allow for any anticipated recovery in market value.
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, and trade accounts receivable. We invest our cash in bank accounts, certificates of
deposit, and money market accounts with major financial institutions, in U.S. Treasury 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 are limited due to the large number of customers comprising our customer base and their dispersion across
different industries and geographic areas.
Accounts Receivable, Net
Trade accounts receivable are recorded at the invoiced amount and are not interest-bearing.
Accounts receivable, net, includes costs in excess of billings and estimated earnings on arrangements recognized under contract
accounting methods, representing revenue recognized on contracts for which billing will occur in subsequent periods, in
accordance with the terms of the contracts. Costs in excess of billings and estimated earnings on such contracts were $30.2
million and $22.5 million at January 31, 2015 and 2014, respectively.
The application of our revenue recognition policies sometimes results in circumstances for which we are unable to recognize
revenue relating to sales transactions that have been billed, but the related account receivable has not been collected. For
consolidated balance sheet presentation purposes, we do not recognize the deferred revenue or the related account receivable
and no amounts appear in our consolidated balance sheets for such transactions. Only to the extent that we have received cash
for a given deferred revenue transaction is the amount included in deferred revenue on the consolidated balance sheets.
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
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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, 2015, 2014,
and 2013:
(in thousands)
Balance at beginning of period
Provisions charged to expense
Amounts written off
Other, including fluctuations in foreign exchange rates
Balance at end of period
Inventories
Year Ended January 31,
2014
2013
2015
$
$
1,187
423
(461)
(50)
1,099
$
$
1,775
1,100
(1,700)
12
1,187
$
$
2,929
250
(1,520)
116
1,775
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 to seven years. Software is depreciated over periods ranging from three to four
years. Buildings are depreciated over periods ranging from ten to twenty-five years. Leasehold improvements are amortized
over the shorter of their estimated useful lives or 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.
Goodwill, Other Acquired Intangible Assets, and Long-Lived Assets
We record goodwill when the purchase price of net tangible and identifiable intangible assets we acquire exceeds their fair
value. 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 ("IPR&D"). We
amortize the cost of finite-lived identifiable intangible assets over their estimated useful lives, which are periods of ten 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.
We regularly perform reviews to determine if the carrying values of our goodwill and other intangible assets are impaired.
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, 2015, our reporting units are consistent with our operating
segments identified in Note 18, "Segment, Geographic, and Significant Customer Information".
We review goodwill for impairment utilizing either a qualitative assessment or a two-step process. If we decide that it is
appropriate to perform a qualitative assessment and conclude that the fair value of a reporting unit more likely than not exceeds
its carrying value, no further evaluation is performed. For reporting units where we perform the two-step process, the first step
requires us to estimate the fair value of each reporting unit and compare that fair value to the respective carrying value, which
includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired and
no further evaluation is performed. If the carrying value is higher than the estimated fair value, there is an indication that
impairment may exist and the second step is performed, in which case the implied fair value of goodwill is calculated as the
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excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of
goodwill is less than the carrying value of the reporting unit’s goodwill, the difference is recognized as an impairment charge.
For reporting units where we decide to perform a qualitative assessment, we assess and make judgments regarding a variety of
factors which potentially impact the fair value of a reporting unit, including general economic conditions, industry and market-
specific conditions, customer behavior, cost factors, our financial performance and trends, our strategies and business plans,
capital requirements, management and personnel issues, and our stock price, among others. We then consider the totality of
these and other factors, placing more weight on the events and circumstances that are judged to most affect a reporting unit’s
fair value or the carrying amount of its net assets, to reach a qualitative conclusion regarding whether it is more likely than not
that the fair value of a reporting unit exceeds its carrying amount.
For reporting units where we perform the two-step process, we utilize some or all of three primary approaches to assess fair
value: (a) an income-based approach, using projected discounted cash flows, (b) a market-based approach, using multiples of
comparable companies, and (c) a transaction-based approach, using multiples for recent acquisitions of similar businesses made
in the marketplace. Our estimate of fair value of each reporting unit is based on a number of subjective factors, including: (a)
appropriate consideration of valuation approaches (income approach, comparable public company approach, and comparable
transaction approach), (b) estimates of future growth rates, (c) estimates of our future cost structure, (d) discount rates for our
estimated 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.
Further information regarding our annual goodwill impairment reviews appears in Note 5, "Intangible Assets and Goodwill".
Acquired IPR&D projects which have not reached technological feasibility at the date of acquisition are considered indefinite-
lived intangible assets and are not subject to amortization until the completion or abandonment of the associated research and
development efforts. Upon completion of the development process, the IPR&D assets are amortized over their estimated useful
lives. If a project is abandoned rather than completed, the IPR&D asset is written-off. IPR&D assets are tested for impairment
annually or more frequently if events or changes in circumstances indicate that the assets might be impaired.
We review finite-lived intangible assets and other long-lived assets when an event occurs indicating the potential for
impairment. If any indicators are present, we perform a recoverability test by comparing the sum of the estimated undiscounted
future cash flows attributable to the assets in question to their carrying amounts. If the undiscounted cash flows used in the test
for recoverability are less than the long-lived assets carrying amount, we determine the fair value of the long-lived asset and
recognize an impairment loss if the carrying amount of the long-lived asset exceeds its fair value. The impairment loss
recognized is the amount by which the carrying amount of the long-lived asset exceeds its fair value.
Fair Values of Financial Instruments
Our recorded amounts of cash and cash equivalents, restricted cash and restricted bank time deposits, accounts receivable,
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. Fair value disclosures regarding our money market funds, short-term investments, derivative
financial instruments, contingent consideration obligations, and long-term debt are included in Note 12, "Fair Value
Measurements".
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.
The criteria we use for designating a derivative as a hedge include contemporaneous and ongoing documentation of the
instrument’s effectiveness in risk reduction and direct matching of the financial instrument to the underlying transaction. 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.
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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.
For the years ended January 31, 2015, 2014, and 2013, certain foreign currency forward contracts qualified for accounting as
hedges and accordingly, the effective portions of the changes in fair value of these instruments were recorded in accumulated
other comprehensive income (loss) in our consolidated balance sheets, net of income taxes, and are reclassified to the
consolidated statements of operations when the effects of the item being hedged are recognized in the consolidated statements
of operations. The ineffective portion, if any, of these contracts is reported in other income (expense), net. For derivative
financial instruments not accounted for as hedges, gains and losses from changes in their fair values are reported in other
income (expense), net. See Note 13, "Derivative Financial Instruments", for further details.
Long-term Debt
We capitalize debt issuance costs, as well as costs incurred for subsequent modification of debt, incurred in connection with our
long-term borrowings and credit facilities. We amortize these costs as an adjustment to interest expense over the remaining
contractual life of the associated long-term borrowing or credit facility using the effective interest method for term loans and
convertible debt borrowings, and the straight-line method for revolving credit facilities. When unscheduled principal payments
are made, we adjust the amortization of our deferred debt-related costs to reflect the expected remaining terms of the
borrowing.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is
regularly evaluated 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 three operating segments, which are also our reportable segments, Enterprise Intelligence
Solutions ("Enterprise Intelligence"), Communications and Cyber Intelligence Solutions ("Communications Intelligence"), and
Video and Situation Intelligence Solutions ("Video Intelligence"). Organizing our business through three 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 regularly
reviews segment revenue and segment operating contribution when assessing financial results of segments and allocating
resources.
We measure the performance of our operating segments based upon segment revenue and segment contribution. Segment
contribution includes segment revenue and expenses incurred directly by the segment, including material costs, service costs,
research and development and selling, marketing, and administrative expenses. We do not allocate certain expenses, which
include the majority of general and administrative expenses, facilities and communication expenses, purchasing expenses,
manufacturing support and logistic expenses, depreciation and amortization, amortization of capitalized software development
costs, stock-based compensation, and special charges such as restructuring costs when calculating segment contribution. These
expenses are included within unallocated expenses in our presentation of segment operating results. Revenue from transactions
between our operating segments is not material. See Note 18, "Segment, Geographic, and Significant Customer Information",
for further details.
Revenue Recognition
We derive and report our revenue in two categories: (a) product revenue, including sale of hardware products (which include
software that works together with the hardware to deliver the product's essential functionality) and licensing of software
products, and (b) service and support revenue, including revenue from installation services, post-contract customer support
("PCS"), project management, hosting services, software-as-a-service ("SaaS"), product warranties, consulting and training
services.
Our revenue recognition policy is a critical component of determining our operating results and is based on a complex set of
accounting rules that require us to make significant judgments and estimates. Our customer arrangements typically include
several elements, including products, services, and support. Revenue recognition for a particular arrangement is dependent
upon such factors as the level of customization within the solution and the contractual delivery, acceptance, payment, and
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support terms with the customer. Significant judgment is required to conclude whether collectability of fees is reasonably
assured and whether fees are fixed and determinable.
For arrangements that do not require significant modification or customization of the underlying products, we recognize
revenue when we have persuasive evidence of an arrangement, the product has been delivered or the services have been
provided to the customer, the sales price is fixed or determinable and collectability is reasonably assured. In addition, our
multiple-element arrangements must be carefully reviewed to determine the selling price of each element.
Our multiple-element arrangements consist of a combination of our product and service offerings that may be delivered at
various points in time. For arrangements within the scope of the multiple-deliverable accounting guidance, a deliverable
constitutes a separate unit of accounting when it has stand-alone value and there are no customer-negotiated refunds or return
rights for the delivered elements. For multiple-element arrangements comprised only of tangible products containing software
components and non-software components and related services, we allocate revenue to each element in an arrangement based
on a selling price hierarchy. The selling price for a deliverable is based on its vendor-specific objective evidence ("VSOE") if
available, third-party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is
available. The total transaction revenue is allocated to the multiple elements based on each element's relative selling price
compared to the total selling price. We limit the amount of revenue recognized for delivered elements to an amount that is not
contingent upon future delivery of additional products or services or meeting of any specified performance conditions.
Our policy for establishing VSOE for installation, consulting, and training is based upon an analysis of separate sales of
services. We utilize either the substantive renewal rate approach or the bell-shaped curve approach to establish VSOE for our
PCS offerings, depending upon the business segment, geographical region, or product line.
TPE of selling price is established by evaluating largely similar and interchangeable competitor products or services in stand-
alone sales to similarly situated customers. However, as most of our products contain a significant element of proprietary
technology offering substantially different features and functionality, the comparable pricing of products with similar
functionality typically cannot be obtained. Additionally, as we are unable to reliably determine what competitors products'
selling prices are on a stand-alone basis, we are typically not able to determine TPE.
If we are unable to determine the selling price because VSOE or TPE does not exist, we determine ESP for the purposes of
allocating the arrangement's revenue by considering several external and internal factors including, but not limited to, pricing
practices, similar product offerings, margin objectives, geographies in which we offer our products and services, internal costs,
competition, and product life cycle. The determination of ESP is made through consultation with and approval by our
management, taking into consideration our go-to-market strategies. We have established processes to update ESP for each
element, when appropriate, to ensure that it reflects recent pricing experience.
For multiple-element arrangements comprised only of software products and related services, a portion of the total purchase
price is allocated to the undelivered elements, primarily installation services, PCS, consulting and training services, using
VSOE of fair value of the undelivered elements. The remaining portion of the total transaction value is allocated to the
delivered software, referred to as the residual method. If we are unable to establish VSOE for the undelivered elements of the
arrangement, revenue recognition is deferred for the entire arrangement until all elements of the arrangement are delivered.
However, if the only undelivered element is PCS, we recognize the arrangement fee ratably over the PCS period.
For multiple-element arrangements that contain software and software-related elements for which we are unable to establish
VSOE of one or more elements, we use various available indicators of fair value and apply our best judgment to reasonably
classify the arrangement's revenue into product revenue and service revenue for financial reporting purposes.
For multiple-element arrangements that are comprised of a combination of hardware and software elements, the total
transaction value is bifurcated between the hardware elements and the software elements that are not essential to the
functionality of the hardware, based on the relative selling prices of the hardware elements and the software elements as a
group. Revenue is then recognized for the hardware and hardware-related services following the hardware revenue recognition
methodology outlined above and revenue for the software and software-related services is recognized following the residual
method or ratably over the PCS period if VSOE for PCS does not exist.
PCS revenue is derived from providing technical software support services and unspecified software updates and upgrades to
customers on a when-and-if-available basis. PCS revenue is recognized ratably over the term of the maintenance period, which
in most cases is one year.
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Under the substantive renewal rate approach, we believe it is necessary to evaluate whether both the support renewal rate and
term are substantive and whether the renewal rate is being consistently applied to subsequent renewals for a particular
customer. We establish VSOE under this approach through analyzing the renewal rate stated in the customer agreement and
determining whether that rate is above the minimum substantive VSOE renewal rate established for that particular PCS
offering. The minimum substantive VSOE rate is determined based upon an analysis of renewal rates associated with historical
PCS contracts. For multiple-element software arrangements that do not contain a stated renewal rate, revenue associated with
the entire bundled arrangement is recognized ratably over the PCS term. Multiple-element software arrangements that have a
renewal rate below the minimum substantive VSOE rate are deemed to contain a more than insignificant discount element, for
which VSOE cannot be established. We recognize aggregate contractual revenue for these arrangements over the period that the
customer is entitled to renew its PCS at the discounted rate, but not to exceed the estimated economic life of the product. We
evaluate many factors in determining the estimated economic life of our products, including the support period of the product,
technological obsolescence, and customer expectations. We have concluded that our software products have estimated
economic lives ranging from five to seven years.
Under the bell-shaped curve approach of establishing VSOE, we perform VSOE compliance tests to ensure that a substantial
majority of our actual PCS renewals are within a narrow range of pricing.
Some of our arrangements require significant customization of the product to meet the particular requirements of the customer.
For these arrangements, revenue is recognized under contract accounting principles, typically using the percentage-of-
completion ("POC") method. Under the POC method, revenue recognition is generally based upon the ratio of hours incurred to
date to the total estimated hours required to complete the contract. Profit estimates on long-term contracts are revised
periodically based on changes in circumstances, and any losses on contracts are recognized in the period that such losses
become evident. If the range of profitability cannot be estimated, but some level of profit is assured, revenue is recognized to
the extent of costs incurred, until such time that the project's profitability can be estimated or the services have been completed.
In the event some level of profitability on a contract cannot be assured, the completed-contract method of revenue recognition
is applied.
Our SaaS multiple-element arrangements are typically comprised of subscription and support fees from customers accessing
our software, set-up fees, and fees for consultation 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 arrangements. We recognize revenue for
subscription and support services over the contract period originating when the subscription service is made available to the
customer and the contractual hosting period has commenced. The initial set-up fees are recognized over the longer of the initial
contract period or the period the customer is expected to benefit from payment of the up-front fees. Revenue from consultation
services is generally recognized as services are completed.
If an arrangement includes customer acceptance criteria, revenue is not recognized until we can objectively demonstrate that
the software or services meet the acceptance criteria, or the acceptance period lapses, whichever occurs earlier. If an
arrangement containing software elements obligates us to deliver specified future software products or upgrades, revenue
related to the software elements under the arrangement is initially deferred and is recognized only when the specified future
software products or upgrades are delivered, or when the obligation to deliver specified future software products expires,
whichever occurs earlier.
We record provisions for estimated product returns in the same period in which the associated revenue is recognized. We base
these estimates of product returns upon historical levels of sales returns and other known factors. Actual product returns could
be different from our estimates, and current or future provisions for product returns may differ from historical provisions.
Concessions granted to customers are recorded as reductions to revenue in the period in which they were granted. The vast
majority of our contracts are successfully completed, and concessions granted to customers are minimal in both dollar value
and frequency.
Product revenue derived from shipments to resellers and original equipment manufacturers ("OEMs") who purchase our
products for resale are generally recognized when such products are shipped (on a "sell-in" basis) since we do not expect our
resellers or OEMs to carry inventory of our products. We have historically experienced insignificant product returns from
resellers and OEMs, and our payment terms for these customers are similar to those granted to our end-users. If a reseller or
OEM develops a pattern of payment delinquency, or seeks payment terms longer than generally accepted, we defer the
recognition of revenue until the receipt of cash. Our arrangements with resellers and OEMs are periodically reviewed as our
business and products change.
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In instances where revenue is derived from sale of third-party vendor services and we are a principal in the transaction, we
generally record revenue on a gross basis and record costs related to a sale within cost of revenue. Though uncommon, in cases
where we act as an agent between the customer and the vendor, revenue is recorded net of costs.
Multiple contracts with a single counterparty executed within close proximity of each other are evaluated to determine if the
contracts should be combined and accounted for as a single arrangement. We record reimbursements from customers for out-of-
pocket expenses as revenue. Shipping and handling fees and expenses that are billed to customers are recognized in revenue
and the costs associated with such fees and expenses are recorded in cost of revenue. Historically, these fees and expenses have
not been material. Taxes collected from customers and remitted to government authorities are excluded from revenue.
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, depreciation of equipment used in operations and service, amortization of
capitalized software development costs and certain purchased intangible assets, and related overhead costs.
Where revenue is recognized over multiple periods in accordance with our revenue recognition policies, we have made an
accounting policy election whereby cost of product revenue, including hardware and third-party software license fees, are
capitalized and recognized in the same period that product revenue is recognized, while installation and other service costs are
generally expensed as incurred, except for certain contracts that are accounted for using contract accounting principles.
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.
For certain contracts accounted for using contract accounting principles, revisions in estimates of costs and profits are reflected
in the accounting period in which the facts that require the revision become known, if such facts become known subsequent to
the issuance of the consolidated financial statements. If such facts become known before the issuance of the consolidated
financial statements, the requisite revisions in estimates of costs and profits are reflected in the consolidated financial
statements. At the time a loss on a contract becomes evident, the entire amount of the estimated loss is accrued. Related
contract costs include all direct material and labor costs and those indirect costs related to contract performance.
Customer acquisition and origination costs, including sales commissions, are recorded in selling, general and administrative
expenses. These costs are expensed as incurred, with the exception of certain sales referral fees in our Communications
Intelligence segment which are capitalized and amortized ratably over the revenue recognition period.
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 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 OCS which do not require
us to pay royalties. Funds received from the OCS 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
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We capitalize costs associated with internal-use software systems that have reached the application development stage. 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 begins when the preliminary
project stage is complete and continues until the project is substantially complete and is ready for its intended purpose.
Capitalized costs of computer software developed for internal use are amortized over estimates 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 tax provision
involves the application of complex tax laws and requires significant judgment and estimates.
We evaluate the realizability of our deferred tax assets for each jurisdiction in which we operate at each reporting date, and
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 income tax expense.
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. One of our subsidiaries operates in two economic
environments which have differing foreign exchange risks, and therefore uses a different functional currency in each
environment.
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 $13.4 million and $6.1 million for the years ended January 31, 2015 and
2014, respectively, and net foreign currency gains of $1.0 million for the year ended January 31, 2013.
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 income (loss) in the accompanying
consolidated balance sheets.
Stock-Based Compensation
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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.
When stock options are awarded, the fair value of the option is estimated on the date of grant using the Black-Scholes option-
pricing model. Expected volatility and expected term are input factors to that model that can require significant management
judgment. Expected volatility is estimated utilizing daily historical volatility over a period that equates to the expected life of
the option. The expected life (estimated period of time outstanding) is estimated using the historical exercise behavior of
employees. The risk-free interest rate is the implied daily yield currently available on U.S. Treasury issues with a remaining
term closely approximating the expected term used as the input to the Black-Scholes option pricing model.
Net Income Per Common Share Attributable to Verint Systems Inc.
Shares used in the calculation of basic net income 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.?
Shares used in the calculation of diluted net income per common share are based on the weighted-average number of common
shares outstanding, adjusted for potentially dilutive common shares outstanding during the period. Potentially dilutive common
shares from warrants and stock-based compensation plans are determined using the treasury stock method.?
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 6,
“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.?
Potentially dilutive common shares also included the assumed conversion of our Series A Convertible Perpetual Preferred
Stock ("Preferred Stock"), if dilutive, for periods prior to cancellation of the Preferred Stock on February 4, 2013 in connection
with the CTI Merger. The CTI Merger is further discussed in Note 15, "Merger with CTI".?
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.
Recent Accounting Pronouncements
New Accounting Pronouncements Implemented
?
In March 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon
Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This
new standard is intended to resolve diversity in practice regarding the release into net income of a cumulative translation
adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. ASU No. 2013-05 was effective
prospectively for us on February 1, 2014. The adoption of this standard did not impact our consolidated financial statements.
?
New Accounting Pronouncements To Be Implemented?
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and
Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU
No. 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both
discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It was effective
for us on February 1, 2015. We do not expect the adoption of this standard to materially impact our consolidated financial
statements, absent any disposals of components or groups of components that have a material effect on our financial results in
future periods.?
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09
supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue
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recognition guidance throughout the Industry Topics of the Accounting Standards Codification. Additionally, this update
supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type
Contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. It is effective for the first interim period within annual reporting periods beginning after
December 15, 2016, and early adoption is not permitted. Entities may choose from two adoption methods, with certain practical
expedients. We are currently reviewing this standard to assess the impact on our future consolidated financial statements and
evaluating the available adoption methods.?
In June 2014, the FASB issued ASU No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial
Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. ASU No.
2014-10 removes the financial reporting distinction between development stage entities and other reporting entities from GAAP
and it eliminates an exception provided in the consolidation guidance for development stage enterprises. It is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2015, although early adoption is permitted. We are
currently reviewing this standard to assess the impact on our future consolidated financial statements.?
In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-
Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite
Service Period, which requires that a performance target that affects vesting, and that could be achieved after the requisite
service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the
grant date fair value of the award. ASU No. 2014-12 is effective for annual reporting periods beginning after December 15,
2015, including interim periods within that reporting period, although early adoption is permitted. We are currently reviewing
this standard to assess the impact on our future consolidated financial statements.?
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU defines management’s
responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and
to provide related footnote disclosures. The provisions of ASU No. 2014-15 are effective for annual periods ending after
December 15, 2016 and for annual and interim periods thereafter, and early adoption is permitted. The adoption of ASU No.
2014-15 is not expected to have a material effect on our future consolidated financial statements.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20):
Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU No. 2015-01 eliminates
the concept of an extraordinary item from GAAP. As a result, an entity will no longer be required to separately present an
extraordinary item on its statement of operations, net of tax, after income from continuing operations or to disclose income
taxes and net income per share data applicable to an extraordinary item. However, ASU No. 2015-01 will still retain the
presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU No. 2015-01 is effective
for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period,
although early adoption is permitted. We do not expect the adoption of this standard to materially impact our consolidated
financial statements, absent any material transactions in future periods that would have qualified for extraordinary item
presentation under the prior guidance.
2. NET INCOME PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC.
The following table summarizes the calculation of basic and diluted net income per common share attributable to Verint
Systems Inc. for the years ended January 31, 2015, 2014, and 2013:
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(in thousands, except per share amounts)
Net income
Net income attributable to noncontrolling interest
Net income attributable to Verint Systems Inc.
Dividends on Preferred Stock
Net income attributable to Verint Systems Inc. for basic net income per
common share
Dilutive effect of dividends on Preferred Stock
Net income attributable to Verint Systems Inc. for diluted net income per
common share
Weighted-average shares outstanding:
Basic
Dilutive effect of employee equity award plans
Dilutive effect of 1.50% convertible senior notes
Dilutive effect of warrants
Dilutive effect of assumed conversion of Preferred Stock
Diluted
Net income per common share attributable to Verint Systems Inc.:
Basic
Diluted
Year Ended January 31,
2014
2013
2015
$
$
36,402
5,471
30,931
—
30,931
—
$
58,776
5,019
53,757
(174)
53,583
—
58,804
4,802
54,002
(15,472)
38,530
—
$
30,931
$
53,583
$
38,530
58,096
1,278
—
—
—
59,374
52,967
911
—
—
—
53,878
39,748
564
—
—
—
40,312
$
$
0.53
0.52
$
$
1.01
0.99
$
$
0.97
0.96
We excluded the following weighted-average common shares underlying stock-based awards and the assumed conversion of
our Preferred Stock from the calculations of diluted net income per common share because their inclusion would have been
anti-dilutive:
(in thousands)
Common shares excluded from calculation:
Stock options and restricted stock-based awards
1.50% convertible senior notes
Warrants
Preferred Stock
Year Ended January 31,
2014
2013
2015
226
3,876
3,876
—
247
—
—
123
749
—
—
11,043
The 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 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. Further details regarding
the Notes and the Warrants appear in Note 6, "Long-Term Debt".?
The Preferred Stock was canceled in conjunction with the CTI Merger on February 4, 2013, as further discussed in Note 9,
"Convertible Preferred Stock" and Note 15, "Merger with CTI". The weighted-average common shares underlying the assumed
conversion of the Preferred Stock for the year ended January 31, 2014 in the table above reflect Preferred Stock as outstanding
for only four days during that period.
3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The following tables summarize our cash, cash equivalents and short-term investments as of January 31, 2015 and 2014:
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(in thousands)
Cash and cash equivalents:
Cash and bank time deposits
Money market funds
Commercial paper
Total cash and cash equivalents
Short-term investments:
Commercial paper and corporate debt securities (available-
for-sale)
Bank time deposits
Total short-term investments
(in thousands)
Cash and cash equivalents:
Cash and bank time deposits
Money market funds
Commercial paper
Total cash and cash equivalents
Short-term investments:
Commercial paper and corporate debt securities (available-
for-sale)
Bank time deposits
Total short-term investments
January 31, 2015
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Cost Basis
$
$
$
$
281,890
183
2,999
285,072
13,741
21,909
35,650
$
$
$
$
— $
—
—
— $
— $
—
—
— $
281,890
183
2,999
285,072
101
—
101
$
$
— $
—
— $
13,842
21,909
35,751
January 31, 2014
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Cost Basis
$
$
$
$
314,604
14,023
49,986
378,613
9,402
22,643
32,045
$
$
$
$
$
— $
—
5
5
$
4
$
— $
$
4
— $
—
—
— $
314,604
14,023
49,991
378,618
— $
—
— $
9,406
22,643
32,049
Bank time deposits which are reported within short-term investments consist of deposits held outside of the U.S. with
maturities of greater than 90 days, or without specified maturity dates which we intend to hold for periods in excess of 90 days.
All other bank deposits are included within cash and cash equivalents.
As of January 31, 2015 and 2014, all of our available-for-sale investments had contractual maturities of less than one year.
Gains and losses on sales of available-for-sale securities during the years ended January 31, 2015, 2014, and 2013 were not
significant.
During the years ended January 31, 2015 and 2014, proceeds from sales and maturities of available-for-sale securities were
$13.7 million and $178.8 million, respectively, and were not significant for the year ended January 31, 2013.
We believe that the investments we held at January 31, 2015 were not other-than-temporarily impaired. We held no available-
for-sale securities with unrealized losses at January 31, 2015. We do not intend to sell our available-for-sale securities and it is
not more likely than not that we will be required to sell them before recovery at par, which may be at maturity.
4. BUSINESS COMBINATIONS
Year Ended January 31, 2015
KANA Software, Inc.
On February 3, 2014, we completed the acquisition of KANA Software, Inc. and its subsidiaries through the merger of KANA
Software, Inc.'s parent holding company, Kay Technology Holdings, Inc. (collectively, "KANA"), with an indirect, wholly
owned subsidiary of Verint, with Kay Technology Holdings, Inc. continuing as the surviving company and as our wholly owned
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subsidiary. The purchase price consisted of $542.4 million of cash paid at the closing, partially offset by $25.1 million of
KANA’s cash received in the acquisition, and a $0.7 million post-closing purchase price adjustment, resulting in net cash
consideration of $516.6 million. The post-closing purchase price adjustment resulted from the final determination of KANA's
February 3, 2014 cash, debt, net working capital, transaction expenses and taxes, and was received in cash in May 2014.
The merger consideration was funded by a combination of cash on hand, $300.0 million of incremental term loans incurred in
connection with an amendment to our Credit Agreement, and $125.0 million of borrowings under our 2013 Revolving Credit
Facility (further details for which appear in Note 6, "Long-Term Debt").
KANA, based in Sunnyvale, California and with global operations, is a leading provider of on-premises and cloud-based
solutions which create differentiated, personalized, and integrated customer experiences for large enterprises and mid-market
organizations. KANA has been substantially integrated into our Enterprise Intelligence operating segment.
Among the factors contributing to the recognition of goodwill as a component of the KANA purchase price allocation were
synergies in products and technologies, and the addition of a skilled, assembled workforce. This goodwill has been assigned to
our Enterprise Intelligence segment and while generally not deductible for income tax purposes, certain goodwill related to
previous business combinations by KANA will be deductible for income tax purposes.
In connection with the purchase price allocation for KANA, the estimated fair value of undelivered performance obligations
under customer contracts assumed in the merger was determined utilizing a cost build-up approach. The cost build-up approach
calculates fair value by estimating the costs required to fulfill the obligations plus a reasonable profit margin, which
approximates the amount that we believe would be required to pay a third party to assume the performance obligations. The
estimated costs to fulfill the performance obligations were based on the historical direct costs for delivering similar services. As
a result, in allocating the purchase price, we recorded $7.9 million of current and long-term deferred revenue, representing the
estimated fair value of undelivered performance obligations for which payment had been received, which will be recognized as
revenue as the underlying performance obligations are delivered. For undelivered performance obligations for which payment
had not yet been received, we recorded an $18.6 million asset within prepaid expenses and other current assets as a component
of the purchase price allocation. We are amortizing this asset over the underlying delivery periods for these obligations as a
reduction to revenue, which reduces the revenue we recognize for providing these services to its estimated fair value.
As a result of the substantial integration of KANA into our Enterprise Intelligence operating segment, we are unable to provide
a meaningful measure of the impact on revenue and net income attributable to KANA in our consolidated statements of
operations for the year ended January 31, 2015.
Transaction and related costs directly related to the acquisition of KANA, consisting primarily of professional fees and
integration expenses, were $10.0 million for the year ended January 31, 2015, and were expensed as incurred and are included
in selling, general and administrative expenses.
UTX Technologies Limited
On March 31, 2014, we completed the acquisition of all of the outstanding shares of UTX Technologies Limited (“UTX”), a
provider of certain mobile device tracking solutions for security applications, from UTX Limited. UTX Limited was our
supplier of these products to our Communications Intelligence operating segment prior to the acquisition. The purchase price
consisted of $82.9 million of cash paid at closing, and up to $1.5 million of potential future contingent consideration payments
to UTX Limited, the acquisition date fair value of which was estimated to be $1.3 million.
UTX is based in the Europe, the Middle East and Africa (“EMEA”) region and has been integrated into our Communications
Intelligence operating segment.
Among the factors contributing to the recognition of goodwill as a component of the UTX purchase price allocation were
synergies in products and technologies, and the addition of a skilled, assembled workforce. This goodwill has been assigned to
our Communications Intelligence segment and is not deductible for income tax purposes.
For year ended January 31, 2015, we recorded a charge of $0.2 million within selling, general and administrative expenses to
increase the fair value of the UTX contingent consideration obligation to $1.5 million, in consideration of UTX achieving
certain performance targets. This amount was paid to UTX Limited prior to January 31, 2015.
Revenue and income before provision for income taxes attributable to UTX from March 31, 2014 through January 31, 2015
were not significant to our consolidated operating results.
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Transaction and related costs directly related to the acquisition of UTX, consisting primarily of professional fees, integration
expenses and related adjustments, were $2.5 million for the year ended January 31, 2015 and were expensed as incurred and are
included in selling, general and administrative expenses.
As a result of the UTX acquisition, we recorded a $2.6 million charge for the impairment of certain capitalized software
development costs during the year ended January 31, 2015, reflecting strategy changes in certain product development
initiatives. This charge is reflected within cost of product revenue.
Other Business Combinations
We completed two separate acquisitions of certain technologies and other assets for use in our Communications Intelligence
operating segment on April 16, 2014 and January 15, 2015, respectively, in transactions that qualified as business
combinations. These business combinations were not material to our consolidated financial statements, individually or in the
aggregate.
Purchase Price Allocations
The purchase price allocations for the business combinations completed during the year ended January 31, 2015 were initially
prepared on a preliminary basis, subject to change as additional information became available during the respective
measurement periods (up to one year from the respective acquisition dates). The purchase price allocation for KANA is now
complete, but the purchase price allocation for UTX remains preliminary. Fair values still under review for UTX include values
assigned to identifiable intangible assets, deferred income taxes and reserves for uncertain income tax positions. Through
January 31, 2015, adjustments identified and recorded subsequent to the initial purchase price allocations for both KANA and
UTX were not material.
The purchase prices 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
values assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which
discounts expected future cash flows to present value using estimates and assumptions determined by management.
The following table sets forth the components and the allocations of the purchase prices for our acquisitions of KANA and
UTX, including adjustments identified subsequent to the respective acquisition dates:
(in thousands)
Components of Purchase Prices:
Cash, including post-closing adjustments
Fair value of contingent consideration
Total purchase prices
Allocation of Purchase Prices:
Net tangible assets (liabilities):
Accounts receivable
Other current assets, including cash acquired
Other assets
Current and other liabilities
Deferred revenue - current and long-term
Deferred income taxes - current and long-term
Net tangible liabilities
Identifiable intangible assets:
Customer relationships
Developed technology
Trademarks and trade names
Other intangible assets
Total identifiable intangible assets
Goodwill
Total purchase price allocations
79
KANA
UTX
$
$
$
$
541,685
—
541,685
18,473
49,798
12,203
(17,851)
(7,932)
(60,879)
(6,188)
152,700
55,500
11,500
—
219,700
328,173
541,685
$
$
$
$
82,901
1,347
84,248
—
3,836
924
(263)
(340)
(4,882)
(725)
2,000
37,400
—
1,100
40,500
44,473
84,248
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For the acquisition of KANA, the acquired customer relationships, developed technology, and trademarks and trade names
were assigned estimated useful lives of five to ten years, three to five years, and five years, respectively, the weighted average
of which is approximately 8.1 years.
For the acquisition of UTX, the acquired customer relationships, developed technology and other intangible assets were
assigned estimated useful lives of three years, four years, and four years, respectively, the weighted average of which is
approximately 4.0 years.
The weighted-average estimated useful life of all finite-lived identifiable intangible assets acquired during the year ended
January 31, 2015 is 7.4 years.
The acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the
pattern in which the assets are utilized, over their estimated useful lives.
We have included the financial results of these business combinations in our consolidated financial statements from their
respective acquisition dates.
Pro Forma Information
The following table provides unaudited pro forma operating results for the years ended January 31, 2015 and 2014, as if KANA
and UTX had been acquired on February 1, 2013. These unaudited pro forma results reflect certain adjustments related to these
acquisitions, including amortization expense on finite-lived intangible assets acquired from KANA and UTX, interest expense
and fees associated with additional long-term debt incurred to partially fund the acquisition of KANA, and adjustments to
recognize the fair value of revenue associated with performance obligations assumed in the acquisition of KANA.
For purposes of the following unaudited pro forma operating results, a $44.4 million income tax benefit resulting from a
reduction of valuation allowances associated from the acquisition of KANA is reflected in the pro forma operating results for
the year ended January 31, 2014. The actual tax benefit was recorded during the year ended January 31, 2015, as further
described in Note 11, "Income Taxes".
The unaudited pro forma results do not include any operating efficiencies or potential cost savings which may result from these
business combinations. Accordingly, such unaudited pro forma amounts are not necessarily indicative of the results that
actually would have occurred had the acquisitions been completed on February 1, 2013, nor are they indicative of future
operating results.
(in thousands, except per share amounts)
Revenue
Net income
Net income attributable to Verint Systems Inc.
Net income per common share attributable to Verint Systems Inc.:
Basic
Diluted
Year Ended January 31, 2014
Year Ended January 31,
2015
1,158,141
29,644
24,173
0.42
0.41
$
$
$
$
$
2014
1,032,733
50,432
45,413
0.85
0.84
$
$
$
$
$
On February 4, 2013, we completed the CTI Merger, details for which appear in Note 15, "Merger with CTI".
Other Business Combinations
During the year ended January 31, 2014, in addition to the CTI Merger, we completed five business combinations:
• On August 1, 2013, we acquired certain technology and other assets for use in our Communications Intelligence operating
segment in a transaction that qualified as a business combination.
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• On October 4, 2013, we acquired all of the outstanding shares of a privately held company specializing in performance
improvements in customer contact centers, based in the EMEA region, that has been integrated into our Enterprise
Intelligence operating segment.
• On November 6, 2013, we acquired certain technology and other assets for use in our Communications Intelligence
operating segment in a transaction that qualified as a business combination.
• On December 6, 2013, we acquired all of the outstanding shares of a privately held management consulting and
performance management company, based in the Americas region, that has been integrated into our Enterprise Intelligence
operating segment.
• On December 19, 2013, we acquired all of the outstanding shares of a privately held provider of fraud prevention and
identity authentication solutions, based in the Americas region, that has been integrated into our Enterprise Intelligence
operating segment.
These business combinations were not individually material to our consolidated financial statements.
We have included the financial results of these business combinations in our consolidated financial statements from their
respective acquisition dates.
The combined consideration for these business combinations was approximately $46.1 million, including $34.2 million of
combined cash paid at the closings. We also agreed to make potential additional cash payments to the respective former
shareholders or asset owners aggregating up to approximately $27.4 million, contingent upon the achievement of certain
performance targets over periods ending through January 2019. The combined fair values of these contingent consideration
obligations were estimated to be $11.9 million as of the respective acquisition dates.
The $11.9 million acquisition date combined fair values of the contingent consideration obligations were 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 included 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, 2015 and
2014, we recorded charges of $0.4 million and $0.3 million, respectively, within selling, general and administrative expenses
for changes in the fair values of these contingent consideration obligations, which primarily reflected the impacts of revised
expectations of achieving the performance targets. As of January 31, 2015, the aggregate fair value of the contingent
consideration obligations associated with these acquisitions was $6.8 million, of which $1.3 million was recorded within
accrued expenses and other current liabilities, and $5.5 million was recorded within other liabilities.
The purchase prices were 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. The fair
values assigned to identifiable intangible assets acquired in these business combinations were 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.
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 $19.0 million of goodwill associated with these
business combinations, $18.3 million and $0.7 million was assigned to our Enterprise Intelligence and Communications
Intelligence segments, respectively. For income tax purposes, $5.3 million of this goodwill is deductible and $13.7 million is
not deductible.
Revenue and the impact on net income attributable to these acquisitions for the year ended January 31, 2014 were not
significant.
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Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to these
acquisitions, totaled $0.9 million and $2.7 million for the years ended January 31, 2015 and 2014, respectively. All transaction
and related costs were expensed as incurred and are included in selling, general and administrative expenses.
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, 2014, other than the CTI Merger.
(in thousands)
Components of Purchase Prices:
Cash
Fair value of contingent consideration
Total purchase prices
Allocation of Purchase Prices:
Net tangible assets:
Accounts receivable
Other current assets
Other assets
Current and other liabilities
Deferred revenue
Deferred income taxes - current and long-term
Net tangible assets
Identifiable intangible assets:
Developed technology
Customer relationships
Trademarks and trade names
Total identifiable intangible assets
Goodwill
Total purchase price allocations
Amount
34,229
11,907
46,136
3,687
3,050
275
(2,717)
(1,310)
(2,272)
713
14,009
11,714
649
26,372
19,051
46,136
$
$
$
$
For these acquisitions, customer relationships, developed technology, and trademarks and trade names were assigned estimated
useful lives of from six years to nine years, from three years to five years, and from one year to two years, respectively, the
weighted average of which is approximately 5.9 years.
The pro forma impact of these acquisitions was not material to our historical consolidated operating results and is therefore not
presented.
Year Ended January 31, 2013
We did not complete any business combinations during the year ended January 31, 2013.
Other Business Combination Information
For the years ended January 31, 2015, 2014 and 2013, we recorded a charge of $0.3 million and benefits of $2.8 million and
$6.2 million, respectively, within selling, general and administrative expenses for changes in the fair values of contingent
consideration obligations associated with business combinations completed prior to January 31, 2012. The aggregate fair value
of the remaining contingent consideration obligations associated with these acquisitions was not significant at January 31,
2015.
In connection with a business combination completed during the year ended January 31, 2012, we assumed approximately $5.2
million of long-term liabilities associated with uncertain tax positions of the acquired company. A corresponding
indemnification asset of $5.2 million was also recorded, recognizing the selling shareholders’ contractual obligation to
indemnify us for these pre-acquisition liabilities. As of January 31, 2015 and 2014, these liabilities were $1.4 million and $1.5
million, respectively, and were included within other liabilities. The corresponding indemnification assets as of January 31,
2015 and 2014 were $0.4 million and $0.4 million, respectively, and were included within other assets. During the years ended
January 31, 2014 and 2013, we met the criteria required to adjust several of these pre-acquisition uncertain tax positions, and
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therefore tax liabilities of $1.0 million and $1.1 million were reversed and reflected as components of the provision for income
taxes for the years ended January 31, 2014 and 2013, respectively. Because the liabilities for the uncertain tax positions were
reversed, we also recorded write-offs of the corresponding indemnification assets of $0.9 million and $1.1 million for the years
ended January 31, 2014 and 2013, respectively, which are included in other income (expense), net for those years. In addition,
during the years ended January 31, 2014 and 2013, based upon our assessment of the collectibility of the indemnification from
the former shareholders of the acquired company, we recognized impairments of $0.9 million and $0.4 million, respectively, of
the indemnification assets associated with these liabilities, which are included in other income (expense), net for those years.
No liability reversals or impairments were recorded for the year ended January 31, 2015. The carrying values of these assets
and liabilities were also impacted by foreign currency exchange rate fluctuations.
5.
INTANGIBLE ASSETS AND GOODWILL
Acquisition-related intangible assets consisted of the following as of January 31, 2015 and 2014:
(in thousands)
Intangible assets, all with finite lives:
Customer relationships
Acquired technology
Trade names
Non-competition agreements
Distribution network
Total intangible assets
(in thousands)
Intangible assets with finite lives:
Customer relationships
Acquired technology
Trade names
Non-competition agreements
Distribution network
Backlog
Total intangible assets with finite lives
In-process research and development, with indefinite lives
Total intangible assets
January 31, 2015
Accumulated
Amortization
Cost
378,756
201,294
18,799
3,625
4,440
606,914
$
$
(176,796) $
(104,117)
(9,131)
(2,331)
(2,645)
(295,020) $
Net
201,960
97,177
9,668
1,294
1,795
311,894
January 31, 2014
Accumulated
Amortization
Net
Cost
240,208
106,361
13,378
5,514
2,440
386
368,287
1,700
369,987
$
$
(141,714) $
(76,922)
(11,378)
(4,970)
(1,840)
(316)
(237,140)
—
(237,140) $
98,494
29,439
2,000
544
600
70
131,147
1,700
132,847
$
$
$
$
The following table presents net acquisition-related intangible assets by reportable segment as of January 31, 2015 and 2014:
(in thousands)
Enterprise Intelligence
Communications Intelligence
Video Intelligence
Total
January 31,
2015
2014
$
$
261,354
49,670
870
311,894
$
$
115,928
14,856
2,063
132,847
Total amortization expense recorded for acquisition-related intangible assets was $76.2 million, $36.9 million, and $39.3
million for the years ended January 31, 2015, 2014, and 2013, respectively. The reported amount of net acquisition-related
intangible assets can fluctuate from the impact of changes in foreign exchange rates on intangible assets not denominated in
U.S. dollars.
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Estimated future amortization expense on finite-lived acquisition-related intangible assets is as follows:
(in thousands)
Years Ending January 31,
2016
2017
2018
2019
2020
2021 and thereafter
Total
Amount
78,790
72,097
53,788
25,277
19,237
62,705
311,894
$
$
During the year ended January 31, 2014, we recorded a $0.5 million impairment of an acquired intangible asset, which is
included within cost of product revenue. No impairments of acquired intangible assets were recorded during the years ended
January 31, 2015 and 2013.
Goodwill activity for the years ended January 31, 2015, and 2014, in total and by reportable segment, was as follows:
(in thousands)
Year Ended January 31, 2014:
Goodwill, gross, at January 31, 2013
Accumulated impairment losses through
January 31, 2013
Goodwill, net, at January 31, 2013
Business combinations
Foreign currency translation and other
Goodwill, net, at January 31, 2014
Year Ended January 31, 2015:
Goodwill, gross, at January 31, 2014
Accumulated impairment losses through
January 31, 2014
Goodwill, net, at January 31, 2014
Business combinations
Foreign currency translation and other
Goodwill, net, at January 31, 2015
Balance at January 31, 2015:
Goodwill, gross, at January 31, 2015
Accumulated impairment losses through
January 31, 2015
Goodwill, net, at January 31, 2015
Total
Enterprise
Intelligence
Reportable Segment
Communications
Intelligence
Video
Intelligence
$
896,774
$
771,738
$
48,233
$
76,803
(66,865)
829,909
19,051
4,429
853,389
$
(30,791)
740,947
18,339
5,645
764,931
$
—
48,233
712
(1,107)
47,838
$
(36,074)
40,729
—
(109)
40,620
920,254
$
795,722
$
47,838
$
76,694
(66,865)
853,389
382,422
(34,994)
1,200,817
$
(30,791)
764,931
328,173
(31,582)
1,061,522
$
—
47,838
54,249
(826)
101,261
$
(36,074)
40,620
—
(2,586)
38,034
1,267,682
$
1,092,313
$
101,261
$
74,108
(66,865)
1,200,817
$
(30,791)
1,061,522
$
—
101,261
$
(36,074)
38,034
$
$
$
$
$
Goodwill resulting from a business combination is assigned, at the acquisition date, to those reporting units expected to benefit
from the synergies of the combination.
The results of our goodwill impairment testing as of November 1, 2012 indicated that the estimated fair values of all our
reporting units significantly exceeded their carrying values.
Based upon our November 1, 2014 and 2013 goodwill impairment reviews, we concluded that the estimated fair values of our
Enterprise Intelligence and Communications Intelligence reporting units significantly exceeded their carrying values. The
estimated fair value of our Video Intelligence reporting unit was approximately 20% and 30% greater than its carrying value at
November 1, 2014 and 2013, respectively, and we have therefore concluded that this reporting unit is at more than remote risk
of failing step one of future goodwill impairment tests, and is therefore at risk of future impairment in the event of significant
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unfavorable changes in the assumptions used in our impairment review, including the weighted average cost of capital
(discount rate) and growth rates utilized in our discounted cash flow analysis. Although we believe that our current estimates
are reasonable and appropriate, our Video Intelligence reporting unit competes in a challenging environment and there can be
no assurance that the estimates and assumptions made for purposes of our goodwill impairment test will prove to be accurate
predictions of future performance. Delays or declines in spending to install, upgrade or maintain security intelligence systems,
technological changes, new competitors, or changes in buying patterns from key customers are examples of circumstances that
could adversely impact the fair value of our Video Intelligence reporting unit.
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, 2015, 2014 and 2013.
No goodwill impairment was identified for the years ended January 31, 2015, 2014 and 2013.
6. LONG-TERM DEBT
The following table summarizes our long-term debt at January 31, 2015 and 2014:
(in thousands)
1.50% Convertible Senior Notes:
Principal amount
Unamortized debt discount
1.50% Convertible Senior Notes, net
February 2014 Term Loans:
Gross amount
Unamortized debt discount
February 2014 Term Loans, net
March 2014 Term Loans
March 2013 Term Loans:
Gross amount
Unamortized debt discount
March 2013 Term Loans, net
Other debt
Total debt
Less: current maturities
Long-term debt
1.50% Convertible Senior Notes
January 31,
2015
2014
$
$
400,000
(74,086)
325,914
130,729
(277)
130,452
280,413
—
—
—
23
736,802
23
736,779
$
$
—
—
—
—
—
—
—
645,125
(2,827)
642,298
87
642,385
6,555
635,830
On June 18, 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes due June 1, 2021,
unless earlier converted by the holders pursuant to their terms. 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 our Credit Agreement, as further
described below. Additional details regarding our June 18, 2014 issuance of common stock appear in Note 8, “Stockholders’
Equity”.
The Notes are unsecured and rank senior in right of payment to our indebtedness that is expressly subordinated in right of
payment to the Notes; equal in right of payment to our indebtedness that is not so subordinated; effectively subordinated in
right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and
structurally subordinated to indebtedness and other liabilities of our subsidiaries.
The Notes are convertible into, at our election, cash, shares of common stock, or a combination of both, subject to satisfaction
of specified conditions and during specified periods, as described below. If converted, we currently intend to pay cash in
respect of the principal amount of the Notes.
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The conversion price of the Notes at any time is equal to $1,000 divided by the then-applicable conversion rate. The Notes
have a conversion rate of 15.5129 shares of common stock per $1,000 principal amount of Notes, which represents an effective
conversion price of approximately $64.46 per share of common stock and would result in the issuance of approximately
6,205,000 shares if all of the Notes were converted. The conversion rate has not changed since issuance of the Notes, although
throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events.
Holders may surrender their Notes for conversion at any time prior to the close of business on the business day immediately
preceding December 1, 2020, only under the following circumstances:
•
•
•
during any calendar quarter commencing after the calendar quarter which ended on September 30, 2014, if the closing
sale price of our common stock, for at least 20 trading days (whether or not consecutive) in the period of 30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter, is more than
130% of the conversion price of the Notes in effect on each applicable trading day;
during the ten consecutive trading-day period following any five consecutive trading-day period in which the trading
price for the Notes for each such trading day was less than 98% of the closing sale price of our common stock on such
date multiplied by the then-current conversion rate; or
upon the occurrence of specified corporate events, as described in the indenture governing the Notes, such as a
consolidation, merger, or binding share exchange.
On or after December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the
maturity date, holders may surrender their Notes for conversion regardless of whether any of the foregoing conditions have
been satisfied.
As of January 31, 2015, 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 carrying amount of the debt component of the Notes to be $319.9 million at the issuance date, assuming a 5.00%
non-convertible borrowing rate. The carrying amount of the equity component was determined to be approximately $80.1
million by deducting the carrying amount of the debt component from the principal amount of the Notes, and 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 were recorded within
other assets 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, 2015. Including the impact of the debt discount and related deferred debt
issuance costs, the effective interest rate on the Notes was approximately 5.29% at January 31, 2015.
Based on the closing market price of our common stock on January 31, 2015, 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
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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, 2015, 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, 2015, no Warrants had been exercised and all Warrants remained outstanding.
The Note Hedges and Warrants both meet the requirements for classification within stockholders’ equity, and their respective
fair values are not remeasured and adjusted as long as these instruments continue to qualify for stockholders’ equity
classification.
Credit Agreement
Background
In April 2011, we entered into a credit agreement (together with the subsequent amendments discussed herein, the “Credit
Agreement") with our lenders and concurrently terminated a prior credit agreement. The Credit Agreement provided for $770.0
million of secured credit facilities, comprised of $600.0 million of term loans maturing in October 2017 (the “April 2011 Term
Loans") and a $170.0 million revolving credit facility maturing in April 2016 (the “2011 Revolving Credit Facility”), subject to
increase (up to a maximum increase of $300.0 million) and reduction from time to time.
We incurred debt issuance costs of $14.8 million associated with the Credit Agreement, which were deferred and were
classified within other assets, and were being amortized as interest expense over the term of the Credit Agreement.
2013 Amendment and Restatement of Credit Agreement
On March 6, 2013, we entered into an amendment and restatement agreement with our lenders, providing for the amendment
and restatement of the Credit Agreement. The amendment and restatement agreement provided for $850.0 million of senior
secured credit facilities, comprised of $650.0 million of term loans maturing in September 2019 (the "March 2013 Term
Loans") and a $200.0 million revolving credit facility maturing in March 2018 (the “2013 Revolving Credit Facility”), subject
to increase (up to a maximum increase of $300.0 million) and reduction from time to time.
The March 2013 Term Loans were subject to an original issuance discount of 0.50%, or $3.3 million, resulting in net proceeds
of $646.7 million. The discount was being amortized as interest expense over the term of the March 2013 Term Loans using
the effective interest method.
The majority of the proceeds of the March 2013 Term Loans were used to repay all $576.0 million of outstanding April 2011
Term Loans at the March 6, 2013 closing date of the amendment and restatement agreement. There were no outstanding
borrowings under the 2011 Revolving Credit Facility at the March 6, 2013 closing date.
As further described below, on March 7, 2014, the March 2013 Term Loans were extinguished and replaced with the March
2014 Term Loans, and the basis for determining the interest rate on borrowings under the 2013 Revolving Credit Facility was
also amended.
From March 6, 2013 through March 6, 2014, the March 2013 Term Loans and borrowings under the 2013 Revolving Credit
Facility, if any, incurred interest, payable quarterly or, in the case of Eurodollar loans with an interest period of three months or
shorter, at the end of any interest period, at a per annum rate of, at our election:
•
in the case of Eurodollar loans, the Adjusted LIBO Rate plus 3.00% (or, if our corporate credit ratings are BB- and
Ba3 or better, 2.75%). The Adjusted LIBO Rate is the greater of (i) 1.00% per annum and (ii) the product of the LIBO
Rate and Statutory Reserves (both as defined in the Credit Agreement), and
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•
in the case of Base Rate loans, the Base Rate plus 2.00% (or, if our corporate credit ratings are BB- and Ba3 or better,
1.75%). The Base Rate is the greatest of (i) the administrative agent's prime rate, (ii) the Federal Funds Effective Rate
(as defined in the Credit Agreement) plus 0.50% and (iii) the Adjusted LIBO Rate for a one-month interest period plus
1.00%.
As of January 31, 2014, the interest rate on the March 2013 Term Loans was 4.00%.
At the March 6, 2013 closing date of the amendment and restatement agreement, there were $11.0 million of unamortized
deferred debt issuance costs and $2.2 million of unamortized discount associated with the April 2011 Term Loans and the 2011
Revolving Credit Facility. Of the $11.0 million of unamortized deferred debt issuance costs, $3.5 million were associated with
commitments under the 2011 Revolving Credit Facility provided by lenders that continued to provide revolving credit
commitments under the 2013 Revolving Credit Facility and therefore continued to be deferred, and were being amortized over
the remaining term of the Credit Agreement. The remaining $7.5 million of unamortized deferred debt issuance costs and the
$2.2 million unamortized discount, all of which related to the April 2011 Term Loans, were written off as a $9.7 million loss on
early retirement of debt for the year ended January 31, 2014.
We incurred debt issuance costs of approximately $7.5 million associated with the March 2013 Term Loans and the 2013
Revolving Credit Facility, which were deferred and classified within other assets and were being amortized as interest expense
over the remaining term of the Credit Agreement. Of these deferred debt issuance costs, $5.0 million were associated with the
March 2013 Term Loans and were being amortized using the effective interest rate method, and $2.5 million were associated
with the 2013 Revolving Credit Facility and were being amortized on a straight-line basis.
We are required to pay a commitment fee equal to 0.50% per annum of the undrawn portion on the 2013 Revolving Credit
Facility, payable quarterly, and customary administrative agent and letter of credit fees. These fees were unchanged from the
2011 Revolving Credit Facility.
2014 Amendments to Credit Agreement
During the year ended January 31, 2015, we entered into five separate amendments to the Credit Agreement as described
below.
On February 3, 2014, in connection with the acquisition of KANA, we borrowed $125.0 million under the 2013 Revolving
Credit Facility and entered into Amendment No. 1 pursuant to which, on such date, we incurred $300.0 million of incremental
term loans (the “February 2014 Term Loans”), maturing in September 2019. The net proceeds of these borrowings were used to
fund a portion of the KANA purchase price.
The February 2014 Term Loans were subject to an original issuance discount of 0.25%, or $0.8 million. In June 2014, we wrote
off $0.4 million of the unamortized discount in connection with the early retirement of a portion of the February 2014 Term
Loans, as further described below. This discount is amortized as interest expense over the term of the February 2014 Term
Loans using the effective interest method.
The February 2014 Term Loans bear interest, payable quarterly or, in the case of Eurodollar loans with an interest period of
three months or less, at the end of the applicable interest period, at a per annum rate of, at our election:
•
•
in the case of Eurodollar loans, the Adjusted LIBO Rate plus 2.75%. The Adjusted LIBO Rate is the greater of (i)
0.75% per annum and (ii) the product of (x) the LIBO Rate and (y) Statutory Reserves (both as defined in the Credit
Agreement), and
in the case of Base Rate loans, the Base Rate plus 1.75%. The Base Rate is the greatest of (i) the administrative
agent’s prime rate, (ii) the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.50% and (iii) the
Adjusted LIBO Rate for a one-month interest period plus 1.00%.
We incurred debt issuance costs of approximately $7.1 million associated with the February 2014 Term Loans, which were
deferred and classified within other assets. In June 2014, we wrote off $3.8 million of these deferred costs in connection with
the early retirement of a portion of the February 2014 Term Loans, as further described below. These deferred costs are
amortized as interest expense over the term of the February 2014 Term Loans using the effective interest rate method.
On February 3, 2014, we also entered into Amendment No. 2 to, among other things, (i) permit us to increase the permitted
amount of additional incremental term loans and revolving credit commitments under the Credit Agreement (beyond the
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February 2014 Term Loans borrowed under Amendment No. 1) by up to, in the aggregate, $200.0 million plus an additional
amount such that the First Lien Leverage Ratio (as defined in Amendment No. 2) would not exceed the specified maximum
ratio set forth therein, (ii) increase the size of certain negative covenant basket carve-outs, (iii) permit us to issue Permitted
Convertible Indebtedness (as defined in Amendment No. 2), and (iv) permit us to refinance all or a portion of any existing class
of term loans under the Credit Agreement with replacement term loans.
On February 3, 2014, we also entered into Amendment No. 3 to extend by one year, to January 31, 2016, the step-down date of
the leverage ratio covenant applicable to our 2013 Revolving Credit Facility and, subject to the effectiveness of Amendment
No. 4 (as described below), reprice the interest rate applicable to borrowings under the 2013 Revolving Credit Facility to the
interest rate applicable to the February 2014 Term Loans.
On March 7, 2014, we entered into Amendment No. 4 to refinance all $643.5 million of outstanding March 2013 Term Loans at
that date with $643.5 million of new term loans (the “March 2014 Term Loans”), maturing in September 2019. The provisions
for determining the interest rate on the March 2014 Term Loans are identical to such provisions for the February 2014 Term
Loans. The repricing of the interest rate applicable to borrowings under the 2013 Revolving Credit Facility contemplated by
Amendment No. 3 became effective on March 7, 2014, upon the effectiveness of Amendment No. 4.
The refinancing of the March 2013 Term Loans with the proceeds of the March 2014 Term Loans pursuant to Amendment No.
4 was accounted for as an early retirement of the March 2013 Term Loans and, as a result, $4.3 million of unamortized deferred
debt issuance costs and $2.8 million of unamortized discount associated with the March 2013 Term Loans as of the March 7,
2014 effective date of Amendment No. 4 were written off as a $7.1 million loss on early retirement of debt.
As of January 31, 2015, the interest rate on both the February 2014 Term Loans and the March 2014 Term Loans was 3.50%.
Taking into account the impact of original issuance discounts, if any, and related deferred debt issuance costs, the effective
interest rates on the February 2014 Term Loans and March 2014 Term Loans were approximately 4.03% and 3.58%,
respectively, at that date.
We incurred $2.4 million of debt issuance costs in consideration of Amendment No. 4, which were deferred and classified
within other assets. In June 2014, we wrote off $1.3 million of these deferred debt issuance costs in connection with the early
retirement of a portion of the March 2014 Term Loans, as further described below. These deferred costs are amortized as
interest expense over the remaining term of the March 2014 Term Loans using the effective interest rate method. There was no
original issuance discount on the March 2014 Term Loans.
On June 18, 2014, we entered into Amendment No. 5, which increased the commitments under the 2013 Revolving Credit
Facility to $300.0 million and extended the termination of the 2013 Revolving Credit Facility to September 2018. We incurred
$0.7 million of costs in consideration of Amendment No. 5, which were deferred and recorded within other assets, and are
being amortized as interest expense on a straight-line basis over the term of the 2013 Revolving Credit Facility.
Early Partial Retirement of Term Loans - June 2014
On June 18, 2014, we utilized the majority of the combined net proceeds from the issuance of the Notes and the concurrent
issuance of 5,750,000 shares of common stock to retire $530.0 million of the February 2014 Term Loans and March 2014 Term
Loans, and all $106.0 million of then-outstanding borrowings under the 2013 Revolving Credit Facility. As a result, $3.8
million and $1.3 million of deferred debt issuance costs associated with the February 2014 Term Loans and March 2014 Term
Loans, respectively, and $0.4 million of unamortized discount associated with the February 2014 Term Loans, were written off
as a $5.5 million loss on early retirement of debt.
Borrowings Under 2013 Revolving Credit Facility
There were no borrowings under the 2013 Revolving Credit Facility at January 31, 2015 and 2014. The initial interest rate on
the February 3, 2014 borrowings under the 2013 Revolving Credit Facility was 4.00%, but was adjusted to 3.50% on March 7,
2014, as further described above.
Other Provisions of the Credit Agreement
Loans under the Credit Agreement are subject to mandatory prepayment requirements with respect to certain asset sales, excess
cash flows (as defined in the Credit Agreement), and certain other events. Optional prepayments of the term loans are permitted
without premium or penalty, other than customary breakage costs associated with the prepayment of loans bearing interest
based on LIBO Rates. Prepayments are applied first to the eight immediately following scheduled term loan principal
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payments, then pro rata to other remaining scheduled term loan principal payments, if any, and thereafter as otherwise provided
in the Credit Agreement.
Our obligations under the Credit Agreement are guaranteed by substantially all of our domestic subsidiaries and certain foreign
subsidiaries that have elected to be disregarded for U.S. tax purposes, and are secured by security interests in substantially all of
our and the aforementioned subsidiaries' assets, subject to certain exceptions detailed in the Credit Agreement and related
ancillary documents.
The Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this type, which
include limitations on us and our subsidiaries with respect to indebtedness, liens, nature of business, investments and loans,
distributions, acquisitions, dispositions of assets, sale-leaseback transactions and transactions with affiliates. The 2013
Revolving Credit Facility also contains a financial covenant that requires us to maintain a ratio of Consolidated Total Debt to
Consolidated EBITDA (each as defined in the Credit Agreement) of no greater than 5.00 to 1 until January 31, 2016 (as
amended on February 3, 2014 by Amendment No. 3, as described above) and no greater than 4.50 to 1 thereafter (the "Leverage
Ratio Covenant"). The limitations imposed by the covenants are subject to certain exceptions as detailed in the Credit
Agreement.
The Credit Agreement provides for certain customary events of default with corresponding grace periods. These events of
default include failure to pay principal or interest when due under the Credit Agreement, failure to comply with covenants, any
representation or warranty made by us proving to be inaccurate in any material respect, defaults under certain other
indebtedness of ours or our subsidiaries, the occurrence of a Change of Control (as defined in the Credit Agreement) with
respect to us and certain insolvency or receivership events affecting us or our significant subsidiaries. Upon the occurrence of
an event of default resulting from a violation of the Leverage Ratio Covenant, the lenders under our 2013 Revolving Credit
Facility may require us to immediately repay outstanding borrowings under the 2013 Revolving Credit Facility and may
terminate their commitments to provide loans under that facility. A violation of the Leverage Ratio Covenant would not, by
itself, result in an event of default under the February 2014 Term Loans or March 2014 Term Loans but may trigger a cross-
default under the term loans in the event we are required to repay outstanding borrowings under the 2013 Revolving Credit
Facility. Upon the occurrence of other events of default, the lenders may require us to immediately repay all outstanding
borrowings under the Credit Agreement and the lenders under our 2013 Revolving Credit Facility may terminate their
commitments to provide loans under the facility.
Future Principal Payments on Term Loans
Prior to June 2014, we were required to make quarterly principal payments on the February 2014 Term Loans and March 2014
Term Loans of $0.8 million and $1.6 million, respectively, through August 1, 2019, with the remaining balances due in
September 2019. Following the partial retirements of the February 2014 Term Loans and March 2014 Term Loans in June
2014, future scheduled principal payments on the February 2014 Term Loans and March 2014 Term Loans as of January 31,
2015 were as follows:
(in thousands)
Years Ending January 31,
2016
2017
2018
2019
2020
Total
Interest Expense
February
2014
Term Loans
$
March
2014
Term Loans
—
1,434
2,869
2,869
273,241
280,413
— $
669
1,337
1,337
127,386
130,729
$
$
The following table presents the components of interest expense incurred on the Notes and on borrowings under our Credit
Agreement for the years ended January 31, 2015, 2014, and 2013:
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(in thousands)
1.50% Convertible Senior Notes:
Interest expense at 1.50% coupon rate
Amortization of debt discount
Amortization of deferred debt issuance costs
Total - 1.50% Convertible Senior Notes
Borrowings under Credit Agreement:
Interest expense at contractual rates
Amortization of debt discounts
Amortization of deferred debt issuance costs
Total - Borrowings under Credit Agreement
Year Ended January 31,
2014
2013
2015
$
$
$
$
3,717
6,014
566
10,297
23,236
116
2,435
25,787
$
$
$
$
— $
—
—
— $
—
—
—
—
26,254
458
2,164
28,876
$
$
27,138
486
3,002
30,626
7. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT INFORMATION
Consolidated Balance Sheets
Inventories consisted of the following as of January 31, 2015 and 2014:
(in thousands)
Raw materials
Work-in-process
Finished goods
Total inventories
Property and equipment, net consisted of the following as of January 31, 2015 and 2014:
(in thousands)
Land and buildings
Leasehold improvements
Software
Equipment, furniture, and other
Less: accumulated depreciation and amortization
Total property and equipment, net
January 31,
2015
2014
6,203
8,481
2,821
17,505
$
$
3,190
5,645
1,858
10,693
January 31,
2015
2014
10,932
25,747
38,305
76,839
151,823
(89,333)
62,490
$
$
3,781
19,438
32,542
62,126
117,887
(77,742)
40,145
$
$
$
$
Depreciation expense on property and equipment was $17.7 million, $13.5 million and $11.8 million the years ended January
31, 2015, 2014, and 2013, respectively.
Other assets consisted of the following as of January 31, 2015 and 2014:
(in thousands)
Deferred debt issuance costs, net
Long-term restricted cash and time deposits
Other
Total other assets
January 31,
2015
2014
$
$
14,894
1,959
13,305
30,158
$
$
9,598
391
14,037
24,026
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Accrued expenses and other current liabilities consisted of the following as of January 31, 2015 and 2014:
(in thousands)
Compensation and benefits
Billings in excess of costs and estimated earnings on uncompleted contracts
Professional and consulting fees
Derivative financial instruments - current portion
Distributor and agent commissions
Taxes other than income taxes
Interest on indebtedness
Contingent consideration - current portion
Other
Total accrued expenses and other current liabilities
Other liabilities consisted of the following as of January 31, 2015 and 2014:
(in thousands)
Unrecognized tax benefits, including interest and penalties
Obligations for severance compensation
Contingent consideration - long-term portion
Other
Total other liabilities
Consolidated Statements of Operations
January 31,
2015
2014
76,736
75,414
7,374
9,509
2,141
9,423
4,597
3,892
32,527
221,613
$
$
69,122
46,569
8,574
—
3,640
8,940
6,595
9,859
25,375
178,674
January 31,
2015
2014
50,451
2,664
10,615
16,488
80,218
$
$
42,280
3,036
7,448
10,693
63,457
$
$
$
$
Other expense, net consisted of the following for the years ended January 31, 2015, 2014, and 2013:
(in thousands)
Foreign currency (losses) gains, net
Gains (losses) on derivative financial instruments, net
Derecognition of indemnification asset related to CTI Merger
Other, net
Total other expense, net
Consolidated Statements of Cash Flows
Year Ended January 31,
2014
2013
2015
$
$
(13,402) $
3,986
—
(155)
(9,571) $
(6,057) $
345
(12,874)
(1,689)
(20,275) $
960
(399)
—
(1,847)
(1,286)
The following table provides supplemental information regarding our consolidated cash flows for the years ended January 31,
2015, 2014, and 2013:
(in thousands)
Cash paid for interest
Cash payments (refunds) of income taxes, net
Non-cash investing and financing transactions:
Accrued but unpaid purchases of property and equipment
Inventory transfers to property and equipment
Liabilities for contingent consideration in business combinations
Purchases under supplier financing arrangements, including capital leases
Leasehold improvements funded by lease incentive
Non-cash net assets acquired in CTI Merger
Year Ended January 31,
2014
2013
2015
29,296
15,362
$
$
24,444
$
(1,748) $
27,497
18,161
4,258
630
8,347
634
2,242
$
$
$
$
$
— $
1,161
$
757
$
11,907
$
$
637
— $
$
3,727
1,058
566
—
—
5,042
—
$
$
$
$
$
$
$
$
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8. STOCKHOLDERS’ EQUITY
Issuance of Common Stock
On June 18, 2014, we completed a public offering of our common stock pursuant to which we issued and sold 5,750,000 shares
of common stock at a price of $47.75 per share. We received aggregate proceeds of $265.6 million from the offering, net of
underwriters’ discounts and commissions, but before deducting approximately $0.7 million of other offering expenses.
Dividends on Common Stock
We did not declare or pay any dividends on our common stock during the years ended January 31, 2015, 2014, and 2013.
Commencing in May 2007, with our issuance of Preferred Stock and our entry into an earlier credit agreement, and continuing
currently under the terms of our Credit Agreement, we are subject to certain restrictions on declaring and paying dividends on
our common stock. Our previously-outstanding Preferred Stock was canceled on February 4, 2013 in connection with the CTI
Merger, further details of which appear in Note 15, "Merger with CTI".
Treasury Stock
Repurchased shares of common stock are recorded as treasury stock, at cost. At January 31, 2015, we held approximately
348,000 shares of treasury stock with a cost of $10.3 million, and at January 31, 2014, we held 302,000 shares of treasury stock
with a cost of $8.0 million .
Shares of restricted stock awards that are forfeited when recipients separate from their employment prior to the lapsing of the
award’s restrictions are recorded as treasury stock.
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.
During the year ended January 31, 2015, we acquired approximately 46,000 shares of treasury stock from directors, executive
officers, and other employees at a cost of $2.2 million. We did not acquire any shares of treasury stock during the year ended
January 31, 2014. During the year ended January 31, 2013, we acquired approximately 18,000 shares of treasury stock from
certain executive officers and directors at a cost of $0.5 million.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes items such as foreign currency translation adjustments and
unrealized gains and losses on certain marketable securities and derivative financial instruments designated as hedges.
Accumulated other comprehensive income (loss) is presented as a separate line item in the stockholders’ equity section of our
consolidated balance sheets. Accumulated other comprehensive income (loss) items have no impact on our net income as
presented in our consolidated statements of operations.
The following table summarizes changes in the components of our accumulated other comprehensive income (loss) by
component for the years ended January 31, 2015 and 2014:
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(in thousands)
Accumulated other comprehensive income (loss) at
January 31, 2013
Other comprehensive income before reclassifications
Amounts reclassified out of accumulated other comprehensive
income (loss)
Net other comprehensive (loss) income
Accumulated other comprehensive income (loss) at
January 31, 2014
Other comprehensive (loss) income before reclassifications
Amounts reclassified out of accumulated other comprehensive
income (loss)
Net other comprehensive (loss) income, current period
Accumulated other comprehensive (loss) income at
January 31, 2015
Unrealized
Gains
(Losses) on
Derivative
Financial
Instruments
Designated as
Hedges
Unrealized
Gains on
Available-for-
Sale
Investments
Foreign
Currency
Translation
Adjustments
Total
$
2,447
$
— $
4,062
(5,024)
(962)
1,485
(11,035)
1,558
(9,477)
9
—
9
9
92
—
92
(46,672) $
5,453
(44,225)
9,524
—
5,453
(41,219)
(45,225)
—
(45,225)
(5,024)
4,500
(39,725)
(56,168)
1,558
(54,610)
$
(7,992) $
101
$
(86,444) $
(94,335)
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, 2015, 2014, and 2013 were as follows:
(in thousands)
Unrealized losses (gains) on derivative
financial instruments:
Foreign currency forward contracts
$
$
9. CONVERTIBLE PREFERRED STOCK
Year Ended January 31,
2015
2014
2013
Location
$
190
159
1,050
458
1,857
(299)
1,558
$
(478) $
(494)
(3,246)
(1,501)
(5,719)
695
(5,024) $
73 Cost of product revenue
83 Cost of service and support revenue
418 Research and development, net
229 Selling, general and administrative
803 Total, before income taxes
(85)
718 Total, net of income taxes
(Benefit) provision for income taxes
In 2007, our former controlling shareholder, CTI, purchased 293,000 shares of our Series A Convertible Preferred Stock, for
$293.0 million in cash.
On August 12, 2012, we entered into the CTI Merger Agreement providing for the CTI Merger. The CTI Merger was completed
on February 4, 2013 and eliminated CTI's majority ownership and control of us. Upon completion of the CTI Merger, each
outstanding share of Preferred Stock, all of which was held by CTI, was canceled. Further details regarding the CTI Merger
appear in Note 15, "Merger Agreement with CTI".
Cash dividends on the Preferred Stock were cumulative and were calculated quarterly at a specified dividend rate on the
liquidation preference in effect at such time. At the time of its cancellation in connection with the CTI Merger on February 4,
2013, the dividend rate on the Preferred Stock was 3.875%, and no dividends had been declared or paid on the Preferred Stock
in any period. Other than through these cumulative dividends, the Preferred Stock did not participate in our earnings.
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Upon cancellation of 293,000 shares of Preferred Stock in connection with the CTI Merger, our authorized shares of preferred
stock were reduced from 2,500,000 shares to 2,207,000 shares, in accordance with the Preferred Stock's Certificate of
Designation.
10. RESEARCH AND DEVELOPMENT, NET
Our gross research and development expenses for the years ended January 31, 2015, 2014, and 2013, were $178.7 million,
$131.6 million, and $121.2 million, respectively. OCS reimbursements amounted to $3.2 million, $3.5 million, and $3.3 million
for the years ended January 31, 2015, 2014, and 2013, respectively, which were recorded as reductions of gross research and
development expenses. We recorded other reimbursements of research and development expenses of $1.8 million, $1.6 million,
and $1.9 million for the years ended January 31, 2015, 2014, and 2013, respectively.
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, 2015, 2014, and 2013 was as follows:
(in thousands)
Capitalized software development costs, net, beginning of year
Software development costs capitalized during the year
Amortization of capitalized software development costs
Impairments, foreign currency translation and other
Capitalized software development costs, net, end of year
Year Ended January 31,
2014
2013
2015
$
$
8,483
6,083
(1,666)
(2,788)
10,112
$
$
6,343
6,668
(2,482)
(2,046)
8,483
$
$
5,846
3,916
(3,089)
(330)
6,343
During the years ended January 31, 2015 and 2014, we recorded $2.6 million and $2.1 million, respectively, for impairment of
capitalized software development costs reflecting strategy changes in certain product development initiatives, due primarily to
acquisition of technology associated with business combinations. Impairments recorded for the year ended January 31, 2013
were not significant.
11. INCOME TAXES
The components of income before (benefit) provision for income taxes for the years ended January 31, 2015, 2014, and 2013
were as follows:
(in thousands)
Domestic
Foreign
Total income before (benefit) provision for income taxes
Year Ended January 31,
2014
2013
2015
$
$
(53,877) $
75,280
21,403
$
(37,987) $
101,302
63,315
$
(11,292)
79,056
67,764
The (benefit) provision for income taxes for the years ended January 31, 2015, 2014, and 2013 consisted of the following:
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(in thousands)
Current provision (benefit) for income taxes:
Federal
State
Foreign
Total current provision for income taxes
Deferred (benefit) provision for income taxes:
Federal
State
Foreign
Total deferred (benefit) provision for income taxes
Total (benefit) provision for income taxes
Year Ended January 31,
2014
2013
2015
$
$
$
342
1,575
30,415
32,332
(40,007)
(2,610)
(4,714)
(47,331)
(14,999) $
(12,966) $
664
14,288
1,986
2,187
493
(127)
2,553
4,539
$
15
523
8,094
8,632
3,880
226
(3,778)
328
8,960
The reconciliation of the U.S. federal statutory rate to our effective tax rate on income before (benefit) provision for income
taxes for the years ended January 31, 2015, 2014, and 2013 was as follows:
(in thousands)
U.S. federal statutory income tax rate
Income tax provision at the U.S. federal statutory rate
State tax (benefit) provision
Foreign tax rate differential
Tax incentives
Valuation allowances
Stock-based and other compensation
Non-deductible expenses
Tax credits
Tax contingencies
U.S. tax effects of foreign operations
Other, net
Total (benefit) provision for income taxes
Effective income tax rate
Year Ended January 31,
2014
2013
2015
35.0 %
35.0 %
35.0 %
$
$
7,489
(1,739)
(9,650)
(14,865)
(10,922)
4,222
2,156
(2,461)
9,891
1,451
(571)
(14,999)
$
$
22,160
982
(15,756)
(14,390)
10,597
3,163
4,969
(2,277)
(5,102)
1,197
(1,004)
4,539
$
$
(70.1)%
7.2%
23,717
1,055
(12,471)
(29,171)
4,844
1,833
1,329
(4,170)
17,546
3,854
594
8,960
13.2%
Our operations in Israel have been granted "Approved Enterprise" 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 to eight years (generally 10-25%,
depending on the percentage of foreign investment in the company). These tax incentives decreased our effective tax rates by
64.0%, 22.7%, and 43.0% for the years ended January 31, 2015, 2014, and 2013, respectively.
Deferred tax assets and liabilities consisted of the following at January 31, 2015 and 2014:
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(in thousands)
Deferred tax assets:
Accrued expenses
Deferred revenue
Loss carryforwards
Tax credits
Stock-based and other compensation
Capitalized research and development expenses
Other, net
Total deferred tax assets
Deferred tax liabilities:
Goodwill and other intangible assets
Unremitted earnings of foreign subsidiaries
Other, net
Total deferred tax liabilities
Valuation allowance
Net deferred tax (liabilities) assets
Recorded as:
Current deferred tax assets
Long-term deferred tax assets
Current deferred tax liabilities
Long-term deferred tax liabilities
Net deferred tax (liabilities) assets
Year Ended January 31,
2014
2015
$
5,876
10,058
153,351
9,290
16,609
4,883
1,745
201,812
(62,815)
(15,817)
(2,089)
(80,721)
(131,909)
(10,818) $
$
11,176
10,778
(2,108)
(30,664)
(10,818) $
6,800
12,387
137,565
8,795
15,060
3,914
910
185,431
(32,134)
—
(1,484)
(33,618)
(146,860)
4,953
9,002
9,783
(474)
(13,358)
4,953
$
$
$
$
At January 31, 2015 and 2014, we had U.S. federal net operating loss ("NOL") carryforwards of approximately $656.5 million
and $631.2 million, respectively. These loss carryforwards expire in various years ending from January 31, 2018 to 2034. We
had state NOL carryforwards of approximately $247.5 million and $211.3 million in the same respective years, expiring in
years ending from January 31, 2015 to 2034. We had foreign NOL carryforwards of approximately $61.8 million and $51.9
million in the same respective years. At January 31, 2015, all but $5.3 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. The NOL carryforwards for tax return purposes are different from the NOL
carryforwards for financial statement purposes, primarily due to the reduction of NOL carryforwards for financial statement
purposes under the authoritative guidance on accounting for uncertainty in income taxes. We had U.S. federal, state and foreign
tax credit carryforwards of approximately $18.1 million and $14.4 million at January 31, 2015 and 2014, respectively, the
utilization of which is subject to limitation. At January 31, 2015, approximately $2.7 million of these tax credit carryforwards
may be carried forward indefinitely. The balance of $15.4 million expires in various years ending from January 31, 2016 to
2034.
As of January 31, 2015, we have not provided for deferred taxes on the excess of financial reporting over the tax basis of
investments in certain foreign subsidiaries in the amount of $398.7 million because we plan to reinvest such earnings
indefinitely outside the United States. If these earnings were repatriated in the future, additional income and withholding tax
expense would be incurred. 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 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 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 $131.9 million and $146.9 million at January
31, 2015 and 2014, respectively. The $15.0 million decrease in the valuation allowance between January 31, 2014 and January
31, 2015 arose primarily as a result of the KANA acquisition. In connection with the acquisition of KANA on February 3,
2014, we recorded deferred income tax liabilities primarily attributable to acquired intangible assets to the extent the
amortization will not be deductible for income tax purposes. Under accounting guidelines, because the amortization of the
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intangible assets in future periods provides a source of taxable income, we expect to realize a portion of our existing deferred
income tax assets. As such, we reduced the valuation allowance recorded on our deferred income tax assets to the extent of the
deferred income tax liabilities recorded. Because the valuation allowance related to existing Verint deferred income tax assets,
the impact of the release was reflected as a discrete income tax benefit and not as a component of the KANA acquisition
accounting. The decrease in the valuation allowance caused by the KANA acquisition was offset by increases in net deferred
tax assets primarily related to amortization of acquired intangibles, loss carryforwards, and equity compensation.
Activity in the recorded valuation allowance consisted of the following for the years ended January 31, 2015 and 2014:
(in thousands)
Valuation allowance, beginning of year
(Benefit) provision for income taxes
Additional paid-in capital
Acquisitions
Cumulative translation adjustment
Valuation allowance, end of year
Year Ended January 31,
2014
2015
(146,860) $
10,922
6,913
(3,473)
589
(131,909) $
(104,757)
(10,597)
75
(30,268)
(1,313)
(146,860)
$
$
In accordance with the authoritative guidance for accounting for stock-based compensation, we use a "with-and-without"
approach to applying the intra-period allocation rules in accordance with accounting for income taxes. Under this approach, the
windfall tax benefit is calculated based on the incremental tax benefit received from deductions related to stock-based
compensation. The amount is measured by calculating the tax benefit both "with" and "without" the excess tax deduction; the
resulting difference between the two calculations is considered the windfall. We did not recognize windfall benefits in our U.S.
federal income tax (benefit) provisions for the years ended January 31, 2015, 2014, and 2013.
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, 2015, 2014, and 2013, the aggregate changes in the balance of gross unrecognized tax benefits
were as follows:
(in thousands)
Gross unrecognized tax benefits, beginning of year
Increases related to tax positions taken during the current year
Increases as a result of acquisitions
Increases related to tax positions taken during prior years
Increases (decreases) related to foreign currency exchange rate
Reductions for tax positions of prior years
Lapses of statutes of limitations
Gross unrecognized tax benefits, end of year
Year Ended January 31,
2014
2013
2015
$
$
145,408
15,522
4,744
1,927
(3,900)
(3,440)
(613)
159,648
$
$
55,412
11,013
83,523
—
1,255
(4,491)
(1,304)
145,408
$
$
36,377
8,909
—
15,575
(375)
(3,602)
(1,472)
55,412
As of January 31, 2015, we had $159.6 million of unrecognized tax benefits, of which $153.1 million represents the amount
that, if recognized, would impact the effective income tax rate in future periods. We recorded $1.9 million of expense, a $10.5
million benefit, and $0.6 million of expense for interest and penalties related to uncertain tax positions in our provision for
income taxes for the years ended January 31, 2015, 2014, and 2013, respectively. Accrued liabilities for interest and penalties
were $10.9 million and $8.7 million at January 31, 2015 and 2014, respectively. Interest and penalties (expense and/or benefit)
are recorded as a component of the (benefit) 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 the United
States, with the exception of years in which are currently under examination, we are no longer subject to federal income tax
examination for years prior to January 31, 2012. In Israel, we are no longer subject to income tax examination for years prior
to January 31, 2007. 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, 2014.
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As of January 31, 2015, income tax returns are under examination in the following significant tax jurisdictions:
Jurisdiction
Canada
United Kingdom
India
United States
Tax Years
January 31, 2011 - January 31, 2012
December 31, 2006; January 31, 2008
March 31, 2006 - March 31, 2008; March 31, 2010 - March 31, 2013
December 31, 2011, December 31, 2012
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, 2015 could decrease by approximately
$4.7 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
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When determining the fair value measurements for assets and
liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would
transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk,
transfer restrictions, and risk of nonperformance.
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:
• Level 1: quoted prices in active markets for identical assets or liabilities;
• 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
• Level 3: unobservable inputs that are supported by little or no market activity.
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, 2015 and 2014.
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, 2015 and 2014:
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(in thousands)
Assets:
Money market funds
Commercial paper (1)
Short-term investments, classified as available-for-sale
Foreign currency forward contracts
Total assets
Liabilities:
Foreign currency forward contracts
Contingent consideration - business combinations
Total liabilities
(in thousands)
Assets:
Money market funds
Commercial paper (1)
Short-term investments, classified as available-for-sale
Foreign currency forward contracts
Total assets
Liabilities:
Foreign currency forward contracts
Contingent consideration - business combinations
Total liabilities
$
$
$
$
$
$
$
$
January 31, 2015
Fair Value Hierarchy Category
Level 2
Level 3
Level 1
183
—
—
—
183
$
$
— $
—
— $
— $
2,999
13,842
763
17,604
9,540
—
9,540
$
$
$
—
—
—
—
—
—
14,507
14,507
January 31, 2014
Fair Value Hierarchy Category
Level 2
Level 3
Level 1
14,023
—
—
—
14,023
$
$
— $
—
— $
— $
49,991
9,406
2,466
61,863
846
—
846
$
$
$
—
—
—
—
—
—
17,307
17,307
(1) Commerical paper investments with remaining maturities of 90 days or less at time of purchase, classified within cash
and cash equivalents.
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, 2015 and 2014:
(in thousands)
Fair value measurement at beginning of period
Contingent consideration liabilities recorded for business combinations
Changes in fair values, recorded in operating expenses
Payments of contingent consideration
Foreign currency translation and other
Fair value measurement at end of period
Year Ended January 31,
2015
2014
$
$
17,307
8,347
900
(11,974)
(73)
14,507
$
$
25,041
11,907
(2,588)
(17,094)
41
17,307
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.
Fair Value Measurements
Money Market Funds - We value our money market funds using quoted active market prices for such funds.
Short-term Investments and Commercial Paper - The fair values of short-term investments, as well as commercial paper
classified as cash equivalents, are estimated using observable market prices for identical securities that are traded in less-active
markets, if available. When observable market prices for identical securities are not available, we value these short-term
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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 exchange rates using readily
observable market prices for similar contracts.
Contingent Consideration - Business Combinations - The fair value of the contingent consideration related to business
combinations is estimated using a probability-adjusted discounted cash flow model. These fair value measurements are based
on significant inputs not observable in the market. The key internally developed assumptions used in these models are discount
rates and the probabilities assigned to the milestones to be achieved. We remeasure the fair value of the contingent
consideration at each reporting period, and any changes in fair value resulting from either the passage of time or events
occurring after the acquisition date, such as changes in discount rates, or in the expectations of achieving the performance
targets, are recorded within selling, general, and administrative expenses. Increases or decreases in discount rates would have
inverse impacts on the related fair value measurements, while favorable or unfavorable changes in expectations of achieving
performance targets would result in corresponding increases or decreases in the related fair value measurements. We utilized
discount rates ranging from 2.0% to 41.7% in our calculations of the estimated fair values of our contingent consideration
liabilities as of January 31, 2015. We utilized discount rates ranging from 1.1% to 27.0% in our calculations of the estimated
fair values of our contingent consideration liabilities as of January 31, 2014.
Other Financial Instruments
The carrying amounts of accounts receivable, accounts payable, and accrued liabilities and other current liabilities approximate
fair value due to their short maturities.
The estimated fair values of our term loan borrowings were $409.0 million and $647.0 million at January 31, 2015 and 2014,
respectively. The estimated fair values of the term loans are based upon indicative bid and ask prices as determined by the
agent responsible for the syndication of our term loans. We consider these inputs to be within Level 3 of the fair value hierarchy
because we cannot reasonably observe activity in the limited market in which participations in our term loans are traded. The
indicative prices provided to us as at each of January 31, 2015 and 2014 did not significantly differ from par value. The
estimated fair value of our revolving credit borrowings, if any, is based upon indicative market values provided by one of our
lenders. We had no revolving credit borrowings at January 31, 2015 and 2014.
The estimated fair value of our Notes was approximately $427 million at January 31, 2015. 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 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".
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
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transacted in currencies other than the U.S. dollar, primarily the Israeli shekel and the Canadian dollar. We also periodically
utilize foreign currency forward contracts to manage exposures resulting from forecasted customer collections to be remitted in
currencies other than the applicable functional currency, and exposures from cash, cash equivalents and short-term investments
denominated in currencies other than the applicable functional currency. Our joint venture, which has a Singapore dollar
functional currency, also utilizes foreign exchange forward contracts to manage its exposure to exchange rate fluctuations
related to settlements of liabilities denominated in U.S. dollars. These foreign currency forward contracts generally have
maturities of no longer than twelve months, although occasionally we will execute a contract that extends beyond twelve
months, depending upon the nature of the underlying risk.
Notional Amounts of Derivative Financial Instruments
Our outstanding derivative financial instruments consisted only of foreign currency forward contracts with notional amounts of
$156.8 million and $127.6 million as of January 31, 2015 and 2014, respectively.
Fair Values of Derivative Financial Instruments
The fair values of our derivative financial instruments as of January 31, 2015 and 2014 were as follows:
(in thousands)
Derivative financial instruments
designated as hedging instruments:
Foreign currency forward contracts
Total derivative financial instruments
designated as hedging instruments
Derivative financial instruments not
designated as hedging instruments:
Foreign currency forward contracts
Total derivative financial instruments
not designated as hedging
instruments
(in thousands)
Derivative financial instruments
designated as hedging instruments:
Foreign currency forward contracts
Total derivative financial instruments
designated as hedging instruments
Derivative financial instruments not
designated as hedging instruments:
Foreign currency forward contracts
Total derivative financial instruments
not designated as hedging
instruments
January 31, 2015
Assets
Liabilities
Balance Sheet
Classification
Fair Value
Balance Sheet
Classification
Fair Value
Prepaid expenses and
other current assets
Prepaid expenses and
other current assets
Assets
Balance Sheet
Classification
Prepaid expenses and
other current assets
Prepaid expenses and
other current assets
$
$
$
$
$
$
$
$
164
164
599
599
Accrued expenses
and other liabilities
Accrued expenses
and other liabilities
$
$
$
$
9,194
9,194
345
345
January 31, 2014
Liabilities
Fair Value
Balance Sheet
Classification
Fair Value
2,245
2,245
221
221
Accrued expenses
and other liabilities
Accrued expenses
and other liabilities
$
$
$
$
769
769
77
77
Derivative Financial Instruments in Cash Flow Hedging Relationships
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The effects of derivative financial instruments designated as cash flow hedging instruments for the years ended January 31,
2015 and 2014 were as follows:
Classification of Net
(Losses) Gains
Reclassified from Other
Comprehensive Loss
into the Consolidated
Statements of Operations
Net (Losses) Gains
Recognized in
Accumulated Other
Comprehensive Loss
January 31,
2015
2014
Net (Losses) Gains Reclassified
from Other Comprehensive Loss
into the Consolidated
Statements of Operations
Year Ended January 31,
2015
2014
2013
(in thousands)
Foreign currency forward contracts
$
(7,992) $
1,485
Operating Expenses
$
(1,857) $
5,719
$
(803)
There were no gains or losses from ineffectiveness of these hedges recorded for the years ended January 31, 2015, 2014, and
2013. All of the foreign currency forward contracts underlying the $8.0 million of net unrealized losses recorded in our
accumulated other comprehensive loss at January 31, 2015 mature within twelve months, and therefore we expect all such
losses to be reclassified into earnings within the next twelve months.
Derivative Financial Instruments Not Designated as Hedging Instruments
Gains (losses) recognized on derivative financial instruments not designated as hedging instruments in our consolidated
statements of operations for the years ended January 31, 2015, 2014 and 2013 were as follows:
(in thousands)
Foreign currency forward contracts
Classification in Consolidated
Statements of Operations
Other income (expense), net
14. STOCK-BASED COMPENSATION AND OTHER BENEFIT PLANS
Stock-Based Compensation Plans
Plan Summaries
Year Ended January 31,
2014
2013
2015
$
3,986
$
346
$
(399)
We issue stock-based incentive awards to eligible employees, directors and consultants 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. Our
various Plans permit us to grant a variety of award types, including stock options (both incentive and non-qualified), restricted
stock units (“RSUs”), restricted stock awards (“RSAs”), performance awards, stock appreciation rights, and other awards.
As of January 31, 2015, all Plans other than those described herein are either terminated or otherwise no longer active.
In July 2004, our stockholders approved the 2004 Stock Incentive Compensation Plan (the "2004 Plan") and in October 2010,
approved the 2010 Long-Term Incentive Plan (the "2010 Plan"). Both the 2004 Plan and the 2010 Plan were subsequently
modified to increase or transfer the number of shares authorized for issuance under the Plans. No further grants can be made
under the 2004 Plan. Grants are permitted under the 2010 Plan through June 15, 2022.
In August 2011, in connection with the acquisition of Vovici Corporation, we assumed the Vovici 2006 Amended and Restated
Stock Plan, as amended (the "Vovici Plan"), which will continue in effect until July 28, 2020. We do not expect to use the
shares available for grant under the Vovici Plan for future awards.
In February 2013, in connection with the CTI Merger, we assumed the Comverse Technology, Inc. Stock Incentive
Compensation Plan (the "CTI Plan"), which will continue in effect until September 7, 2021.
The table below summarizes key information for Plans with shares under outstanding grants and/or shares available for grant as
of January 31, 2015:
103
(in thousands)
2004 Plan
2010 Plan
CTI Plan
Vovici Plan
Total
Number of
Shares
Reserved
for Grants
Number of
Shares Under
Outstanding
Grants
Number of
Shares
Available
for Grants
3,000
8,700
2,700
317
41
2,260
250
3
2,554
—
2,714
2,435
—
5,149
As presented in the table above, the number of shares under outstanding grants excludes, and the number of shares available for
grants has not been reduced for, approximately 0.1 million RSUs with performance conditions awarded to officers for which
the performance criteria has not yet been established by our board. Under applicable accounting guidance, if an award is
subject to a performance vesting condition, an accounting grant date for the award is generally not established until the
performance vesting condition has been defined and communicated. The table also excludes approximately 0.3 million shares
available for grants under the Vovici Plan which, as noted above, are not expected to be used for future awards.
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 exercise of stock options, issuance of restricted stock, or issuance of shares under the Plans, we generally issue new
shares of common stock, but occasionally may issue treasury 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, 2015, 2014 and 2013:
(in thousands)
Component of income before (benefit) provision for income taxes:
Cost of revenue - product
Cost of revenue - service and support
Research and development, net
Selling, general and administrative
Total stock-based compensation expense
Income tax benefits related to stock-based compensation (before
consideration of valuation allowances)
Total stock-based compensation, net of taxes
Year Ended January 31,
2014
2013
2015
$
$
$
1,228
5,028
6,421
41,781
54,458
$
759
1,678
3,417
29,137
34,991
12,364
42,094
$
8,171
26,820
$
771
2,086
2,636
19,715
25,208
6,456
18,752
The following table summarizes stock-based compensation expense by type of award for the years ended January 31, 2015,
2014, and 2013:
(in thousands)
Component of stock-based compensation expense:
Restricted stock units and restricted stock awards
Stock options
Phantom stock units
Stock bonus program
Total stock-based compensation expense
Year Ended January 31,
2014
2013
2015
$
$
46,634
15
129
7,680
54,458
$
$
30,115
176
128
4,572
34,991
$
$
20,425
289
516
3,978
25,208
Total stock-based compensation expense by classification was as follows for the years ended January 31, 2015, 2014 and 2013:
104
(in thousands)
Equity-classified awards
Stock bonus program and other reclassifications
Total equity-settled awards
Other liability-classified awards
Total stock-based compensation expense
Year Ended January 31,
2014
2013
2015
$
$
46,963
(651)
46,312
8,146
54,458
$
$
30,471
(298)
30,173
4,818
34,991
$
$
20,174
830
21,004
4,204
25,208
The increase in stock-based compensation expense during the year ended January 31, 2015, compared to the corresponding
prior-year periods, resulted primarily from the combination of an increase in the number of outstanding RSUs, higher expenses
associated with performance-based RSU's, a general increase in the price of our common stock, which is used to determine the
grant-date fair value of an RSU, and a bonus share program, further details for which appear below under "Bonus Share
Program".
Awards under our stock bonus program 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. Our other liability-classified awards include our phantom stock awards and certain
discretionary bonuses. Upon settlement of other liability-classified awards with equity, compensation expense associated with
those awards is reported within equity-classified awards in the table above.
Net excess tax benefits resulting from our Stock Plans were $0.3 million for the year ended January 31, 2015, and nominal for
the years ended January, 2014 and 2013. Excess tax benefits represent a reduction in income taxes, otherwise payable during
the period, attributable to the actual gross tax benefits in excess of the expected tax benefits, and are recorded as increases to
additional paid-in capital.
Stock Options
We did not grant stock options during the years ended January 31, 2015, 2014, and 2013.
The following table summarizes stock option activity under the Plans for the years ended January 31, 2015, 2014, and 2013:
(in thousands, except exercise
prices)
Beginning balance
Exercised
Forfeited
Expired
Ending balance
Stock options exercisable
2015
Weighted-
Average
Exercise
Price
Stock
Options
516
$
(505) $
— $
(2) $
$
9
$
9
34.60
34.71
—
32.13
28.74
28.74
Year Ended January 31,
2014
Weighted-
Average
Exercise
Price
Stock
Options
924
$
(384) $
(8) $
(16) $
$
516
$
515
31.88
28.61
8.71
35.27
34.60
34.64
2013
Weighted-
Average
Exercise
Price
Stock
Options
1,114
$
(121) $
(23) $
(46) $
$
924
$
907
30.40
18.35
30.07
32.73
31.88
32.32
As of January 31, 2015, the aggregate intrinsic value for the options vested and exercisable was $0.2 million with a weighted-
average remaining contractual life of 2.1 years. Additionally, there were 9,000 options vested and expected to vest with a
weighted-average exercise price of $28.74 per share and an aggregate intrinsic value of $0.2 million with a weighted-average
remaining contractual life of 2.1 years.
The unrecognized compensation expense calculated under the fair value method for options expected to vest (unvested shares
net of expected forfeitures) as of January 31, 2015 was not significant.
Options outstanding and exercisable at January 31, 2015 had a weighted average remaining contractual life of 2.1 years.
The following table summarizes certain key data for exercised options:
105
(in thousands)
Intrinsic value of options exercised
Cash received from the exercise of stock options
Tax benefits realized from stock options exercised
Fair value of options vested
Restricted Stock Units and Restricted Stock Awards
Year Ended January 31,
2014
2013
2015
$
$
$
$
8,759
17,606
2,306
178
$
$
$
$
3,817
10,896
780
10,524
$
$
$
$
1,450
2,605
339
17,832
We periodically award RSUs and RSAs 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. The principal difference between these instruments is
that 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. Both
RSAs and RSUs are subject to certain restrictions and forfeiture provisions prior to vesting.
Service-based RSUs typically vest based upon continued service, and we amortize the fair value of such time-based RSUs on a
straight-line basis over the requisite service periods.
We periodically award RSUs to executive officers and certain employees that vest upon the achievement of specified
performance goals (“PRSUs”). For some of these awards, the performance goals are established by our board subsequent to the
award date. As noted above, for PRSUs, an accounting grant date for the award is generally not established until the
performance vesting condition has been defined and communicated. We separately recognize compensation expense for each
tranche of a PRSU award as if it were a separate award with its own vesting date. Therefore, for certain PRSUs, a grant date
has been established but the requisite service period has not yet begun as of January 31, 2015.
Once the performance vesting condition has been defined and communicated, and the requisite service period has begun, our
estimate of the fair value of PRSUs 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 PRSUs, if necessary.
RSUs that settle, or are expected to settle, with cash payments upon vesting are reflected as liabilities on our consolidated
balance sheets.
The following table summarizes activity for RSAs and RSUs (including PRSUs) under the Plans for the years ended January
31, 2015, 2014, and 2013:
2015
Year Ended January 31,
2014
2013
(in thousands, except grant date fair
values)
Beginning balance
Granted
Released
Forfeited
Ending balance
Weighted-
Average
Grant-Date
Fair Value
33.77
46.11
33.11
38.46
40.96
Shares or
Units
Weighted-
Average
Grant-Date
Fair Value
31.42
34.84
31.63
31.87
33.77
$
1,536
1,533
$
(720) $
(99) $
$
2,250
Shares or
Units
Weighted-
Average
Grant-Date
Fair Value
30.25
29.53
27.30
32.59
31.42
$
1,450
1,141
$
(959) $
(96) $
$
1,536
Shares or
Units
$
2,250
1,504
$
(1,009) $
(200) $
$
2,545
We granted 0.3 million, 0.5 million, and 0.1 million PRSUs during the years ended January 31, 2015, 2014, and 2013,
respectively. Shares of common stock earned and issued and under PRSU grants totaled 0.2 million, 0.1 million, and 0.2
million during the years ended January 31, 2015, 2014, and 2013, respectively. As of January 31, 2015, there were 0.5 million
unvested PRSUs outstanding.
With respect of 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 2010 Plan under which such
shares are issued, other shares issued under the Stock Bonus Program are not included in the table above because they do not
reduce available plan capacity. Further details appear below under “Stock Bonus Program”.
106
As of January 31, 2015, unrecognized compensation expense related to 2.4 million unvested RSUs expected to vest subsequent
to January 31, 2015 was approximately $58.8 million, with remaining weighted-average vesting periods of approximately 1.5
years, over which such expense is expected to be recognized. The unrecognized compensation expense does not include
compensation expense related to shares for which a grant date has been established but the requisite service period has not
begun. The total fair values of restricted stock units vested during the years ended January 31, 2015, 2014, and 2013 were $33.4
million, $24.9 million, and $29.1 million, respectively.
Phantom Stock Units
We have periodically issued phantom stock units to certain non-officer 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.
During the year ended January 31, 2013, we made $2.3 million of cash payments to plan participants upon vesting of phantom
stock units.
All other phantom stock unit activity for the years ended January 31, 2015, 2014 and 2013 was not significant.
Stock Bonus Program
In September 2011, our board of directors approved a stock bonus program under which eligible employees may receive a
portion of their bonuses, otherwise payable in cash, in the form of discounted shares of our common stock. Executive officers
have been eligible to participate in this program from and after the year ended January 31, 2014 to the extent that shares
remained 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 to be 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, as described
above.
The following table summarizes certain key data for the stock bonus program for the years ended January 31, 2015, 2014 and
2013:
(in thousands, except discount)
Maximum stock bonus program shares, as approved by board of directors
Discount
Shares in lieu of cash bonus - granted and released
Shares in respect of discount:
Granted
Released
Year Ended January 31,
2014
2013
2015
125
15%
82
12
9
150
15%
69
12
12
150
15%
116
28
28
Shares granted in a particular year, as presented in the table above, represent the shares earned under the prior year's stock
bonus program authorization. Awards earned under the stock bonus program in respect of the performance period ended
January 31, 2015 are expected to be issued during the first half of the year ending January 31, 2016.
The total accrued liability for the Stock Bonus Program was $3.4 million and $4.9 million as of January 31, 2015 and 2014,
respectively.
On March 19, 2015, our board of directors approved up to 125,000 shares of common stock, and a discount of 15%, for awards
under our stock bonus program for the year ending January 31, 2016. Executive officers will be permitted to participate in this
program for the year ending January 31, 2016, but only to the extent that shares remain available for awards following the
107
enrollment of all other participants. Shares awarded to executive officers with respect to the 15% discount will be subject to a
one-year vesting period.
Bonus Share Program
In February 2015, the board of directors authorized the use of shares of common stock available under our equity incentive
plans to award up to approximately $4.7 million in bonuses in respect of performance during the year ended January 31, 2015,
to employees other than executive officers, subject to certain limitations on the aggregate number of shares that may be issued.
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. The liability for these bonuses is included within accrued expenses and other current liabilities at
January 31, 2015.
Shares in respect of this bonus program are expected to be issued during the first half of the year ending January 31, 2016.
There is no discount feature associated with these bonus share awards.
Employee Stock Purchase Plan
Effective September 1, 2002, we adopted and implemented the 2002 Employee Stock Purchase Plan (the "ESPP"). The ESPP,
use of which had been suspended since 2006, was terminated by the board of directors during the year ended January 31, 2015.
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 with three months of service 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 $2.1 million, $1.8 million, and $1.7 million for the years ended
January 31, 2015, 2014, and 2013, 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 the years ended January 31, 2015, 2014, and 2013 were $6.8 million, $5.8 million, and $4.9 million,
respectively.
15. MERGER WITH CTI
Overview
Prior to February 4, 2013, CTI beneficially owned a majority of our common stock (assuming the conversion of CTI’s holdings
of our Series A Convertible Preferred Stock into common stock) and held a majority of the voting power of our common stock.
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As of January 31, 2013, shortly before the CTI Merger (as described below), CTI’s beneficial ownership position in us was
approximately 53.5%.
?
On August 12, 2012, we entered into an agreement and plan of merger agreement with CTI (the "CTI Merger Agreement"),
providing for the merger of CTI with and into our new, wholly owned subsidiary. The CTI Merger was completed on February
4, 2013. The CTI Merger eliminated CTI's majority ownership and control of us.
?
At the closing of the CTI Merger, approximately 28.6 million newly issued shares of our common stock were exchanged for
approximately 220.0 million issued and outstanding shares of CTI common stock. In addition, the 16.3 million shares of our
common stock and all shares of our Preferred Stock held by CTI at the time of the CTI Merger were canceled.?
Holders of shares of our common stock immediately prior to the completion of the CTI Merger, other than CTI, continued to
own their existing shares, which were not affected by the CTI Merger.
Expenses incurred in connection with this matter were not significant during the years ended January 31, 2015 and 2014.
During the year ended January 31, 2013, we incurred expenses associated with this matter of $16.1 million, consisting
primarily of legal and other professional fees, which were expensed as incurred and are reflected within selling, general and
administrative expenses.
The CTI Merger qualified as a tax-free reorganization for U.S. federal income tax purposes.
Prior to the CTI Merger, CTI had distributed to its shareholders or otherwise disposed of substantially all of its assets, other
than its interests in us, including the distribution of all of the outstanding common stock of its subsidiary, Comverse, Inc.
("Comverse") to its shareholders (the “Comverse share distribution”). As a result, at the time of the CTI Merger, the net assets
of CTI consisted primarily of its controlling equity interests in Verint, as well as certain residual cash and cash equivalents and
other sundry net assets. In addition, CTI had NOL carryforwards for income tax reporting purposes, and other tax attributes. No
CTI employees, operations or business processes moved to the combined company in the CTI Merger. As a result, our existing
net assets and operations represented the vast majority of the net assets and all of the operations of the combined company.?
In connection with the Comverse share distribution, CTI and Comverse entered into several agreements to govern certain
ongoing relationships between CTI and Comverse after the Comverse share distribution and to provide for an orderly
transition.?
In one of these agreements, Comverse agreed to indemnify CTI and its affiliates (including Verint following the CTI Merger)
against certain losses arising as a result of the CTI Merger and the Comverse share distribution. Certain of Comverse's
indemnification obligations are capped at $25.0 million and certain obligations are uncapped. Pursuant to this agreement, at the
closing of the CTI Merger, CTI placed $25.0 million into an escrow account to support indemnification claims to the extent
made against Comverse by CTI and its affiliates (including Verint after the CTI Merger). The balance of such escrow account
was released to Comverse on August 4, 2014.?
Consolidated Financial Statement Impact
For financial reporting purposes, the CTI Merger was accounted for as our acquisition of CTI in a combination of entities under
common control. We are the continuing reporting entity. As a result, upon completion of the CTI Merger on February 4, 2013,
our consolidated stockholders' equity was adjusted to reflect the $285.5 million carrying value of our Preferred Stock, all of
which was held by CTI, and the $14.1 million carrying value of CTI's net assets (other than its equity interests in us), as
increases to our additional paid-in capital. Prior to the CTI Merger, our Preferred Stock had been classified as mezzanine equity
on our consolidated balance sheet.
As noted above, CTI's net assets also included net deferred tax assets primarily relating to CTI's NOL carryforwards for income
tax purposes. The net deferred tax assets were fully offset by unrecognized tax benefits and valuation allowances. Also included
in CTI's net assets were $15.8 million of liabilities primarily related to certain unrecognized tax benefits (not offsetting NOL
carryforwards) and accrued penalties and interest and corresponding indemnification assets totaling the same amount,
recognizing Comverse's contractual obligation to indemnify us for these liabilities.
16. RELATED PARTY TRANSACTIONS
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As noted previously, on February 4, 2013 we completed the CTI Merger, which eliminated CTI's majority ownership and
control of us. As of January 31, 2013, prior to the CTI Merger, CTI beneficially owned approximately 53.5%, and also held a
majority of the voting power, of our common stock on an as-converted basis.
During the year ended January 31, 2013, we paid $0.3 million to a subsidiary of CTI for its assignment to us of user licenses for
certain third-party internal-use software. We also paid $1.6 million during the same year to certain subsidiaries of CTI to settle
pre-existing liabilities incurred in the regular course of business.
Previous Relationships with CTI and its Subsidiaries
Prior to the CTI Merger, we were a party to several business agreements with CTI or its affiliates, each of which either
terminated in connection with the CTI Merger, or is inactive and will be formally terminated, with the exception of the Federal
Income Tax Sharing Agreement, which will remain in effect for the foreseeable future. These business agreements included
service agreements whereby, if necessary, we received certain business support services from CTI and its other subsidiaries.
Activity under these service agreements was not significant during the year ended January 31, 2013.
The Federal Income Tax Sharing Agreement with CTI applies to periods prior to our IPO in which we were included in CTI’s
consolidated federal tax return. By virtue of its controlling ownership and this tax sharing agreement, CTI effectively controlled
all of our tax decisions for periods ending prior to the completion of our IPO, which occurred in May 2002. Under the
agreement, for periods during which we were included in CTI's consolidated income tax return, we were required to pay CTI an
amount equal to the tax liability we would have owed, if any, had we filed a federal income tax return on our own, as computed
by CTI in its reasonable discretion. Under the agreement, we were not entitled to receive any payments from CTI in respect of,
or to otherwise take advantage of, any loss resulting from the calculation of our separate income tax liability. The tax sharing
agreement also provided for certain payments in the event of adjustments to the group’s income tax liability. The tax sharing
agreement continues in effect until 60 days after the expiration of the applicable statute of limitations for the final year in which
we were part of the CTI consolidated group for income tax purposes.
Other Related Party Transactions
Our joint venture incurs certain operating expenses, including office rent and other administrative costs, under arrangements
with one of its noncontrolling shareholders. These expenses totaled $0.5 million for each of the years ended January 31, 2015,
2014, and 2013. Revenue recognized from this noncontrolling shareholder by our joint venture was not significant for the year
ended January 31, 2015, and $0.2 million, and $0.3 million for the years ended January 31, 2014 and 2013, respectively.
17. COMMITMENTS AND CONTINGENCIES
Operating and Capital Leases
We lease office, manufacturing, and warehouse space, as well as certain equipment, under non-cancelable operating lease
agreements. We have also periodically entered into capital leases. Terms of the leases, including renewal options and escalation
clauses, vary by lease. When determining the term of a lease, we include renewal options that are reasonably assured. The lease
agreements generally provide that we pay taxes, insurance, and maintenance expenses related to the leased assets over the
initial lease term and those renewal periods that are reasonably assured.
Our facility leases may contain rent escalation clauses or rent holidays, commencing at various times during the terms of the
agreements. Rent expense on operating leases with scheduled rent increases or holidays during the lease term is recognized on
a straight-line basis. The difference between rent expense and rent paid is recorded as deferred rent. Leasehold improvements
are depreciated over the shorter of their economic lives, which begin once the assets are ready for their intended use, or the
term of the lease.
Rent expense incurred under all operating leases was $17.2 million, $15.0 million, and $16.0 million for the years ended
January 31, 2015, 2014, and 2013, respectively.
As of January 31, 2015, our minimum future rentals under non-cancelable operating leases were as follows:
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(in thousands)
Years Ending January 31,
2016
2017
2018
2019
2020
2021 and thereafter
Total
Operating
Leases
15,383
12,550
10,179
8,564
6,453
31,953
85,082
$
$
We sublease certain space in our facilities to third parties. As of January 31, 2015, total expected future sublease income was
$2.5 million and will range from $0.1 million to $1.1 million on an annual basis through August 2018.
On February 13, 2015, we entered into a new operating lease for a facility in Melville, New York, which facility will serve as
our corporate headquarters following the expiration of our existing corporate headquarters lease in November 2015. The new
Melville facility will be occupied under a lease that expires in 2027. The aggregate minimum lease commitment over the term
of this new lease, excluding operating expenses, is approximately $18.8 million. This commitment is not included in the table
of minimum future rentals under non-cancelable operating leases presented above.
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, 2015, our unconditional purchase obligations totaled approximately $57.5 million, the majority of which
were scheduled to occur within the subsequent twelve months. Due to the relatively short life of the obligations, the carrying
value approximates the fair value of these obligations at January 31, 2015.
Warranty Liability
The following table summarizes the activity in our warranty liability, which is included in accrued expenses and other liabilities
in the consolidated balance sheets, for the years ended January 31, 2015, 2014, and 2013:
(in thousands)
Warranty liability, beginning of year
Provision credited against expenses
Warranty charges
Foreign currency translation and other
Warranty liability, end of year
Year Ended January 31,
2014
2013
2015
$
$
706
(60)
—
(13)
633
$
$
1,045
(337)
—
(2)
706
$
$
2,015
(780)
(188)
(2)
1,045
We accrue for warranty costs as part of our cost of revenue based on associated product costs, labor costs, and associated
overhead. Our Enterprise Intelligence solutions are sold with a warranty of generally one year on hardware and 90 days for
software. Our Communications Intelligence solutions and Video Intelligence solutions are sold with warranties that typically
range in duration from 90 days to three years, and in some cases longer.
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 OCS that
fund a portion of our research and development expenditures. The Israeli law under which the OCS 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
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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, 2015, we had approximately $87.9 million of outstanding letters of credit and surety bonds relating primarily to
these performance guarantees. As of January 31, 2015, 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
On March 26, 2009, legal actions were commenced by Ms. Orit Deutsch, a former employee of our subsidiary, Verint Systems
Limited ("VSL"), against VSL in the Tel Aviv Regional Labor Court (Case Number 4186/09) (the “Deutsch Labor Action”) and
against CTI in the Tel Aviv District Court (Case Number 1335/09) (the “Deutsch District Action”). In the Deutsch Labor
Action, Ms. Deutsch filed a motion to approve a class action lawsuit on the grounds that she purports to represent a class of our
employees and former employees who were granted Verint and CTI stock options and were allegedly damaged as a result of the
suspension of option exercises during our previous extended filing delay period. In the Deutsch District Action, in addition to a
small amount of individual damages, Ms. Deutsch is seeking to certify a class of plaintiffs who were allegedly damaged due to
their inability to exercise Verint and CTI stock options as a result of alleged negligence by CTI in its financial reporting. The
class certification motions do not specify an amount of damages. On February 8, 2010, the Deutsch Labor Action was
dismissed for lack of material jurisdiction and was transferred to the Tel Aviv District Court and consolidated with the Deutsch
District Action. On March 16, 2009 and March 26, 2009, respectively, legal actions were commenced by Ms. Roni Katriel, a
former employee of CTI's former subsidiary, Comverse Limited, against Comverse Limited in the Tel Aviv Regional Labor
Court (Case Number 3444/09) (the “Katriel Labor Action”) and against CTI in the Tel Aviv District Court (Case Number
1334/09) (the “Katriel District Action”). In the Katriel Labor Action, Ms. Katriel is seeking to certify a class of plaintiffs who
were granted CTI stock options and were allegedly damaged as a result of the suspension of option exercises during CTI's
previous extended filing delay period. In the Katriel District Action, in addition to a small amount of individual damages, Ms.
Katriel is seeking to certify a class of plaintiffs who were allegedly damaged due to their inability to exercise CTI stock options
as a result of alleged negligence by CTI in its financial reporting. The class certification motions do not specify an amount of
damages. On March 2, 2010, the Katriel Labor Action was transferred to the Tel Aviv District Court, based on an agreed motion
filed by the parties requesting such transfer.
On April 4, 2012, Ms. Deutsch and Ms. Katriel filed an uncontested motion to consolidate and amend their claims and on
June 7, 2012, the District Court allowed Ms. Deutsch and Ms. Katriel to file the consolidated class certification motion and an
amended consolidated complaint against VSL, CTI, and Comverse Limited. Following CTI's announcement of its intention to
effect the Comverse share distribution, on July 12, 2012, the plaintiffs filed a motion requesting that the District Court order
CTI to set aside up to $150.0 million in assets to secure any future judgment. The District Court ruled that it would not decide
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this motion until the Deutsch and Katriel class certification motion was heard. Plaintiffs initially filed a motion to appeal this
ruling in August 2012, but subsequently withdrew it in July 2014.
Prior to the consummation of the Comverse share distribution, CTI either sold or transferred substantially all of its business
operations and assets (other than its equity ownership interests in us and Comverse) to Comverse or unaffiliated third parties.
On October 31, 2012, CTI completed the Comverse share distribution, in which it distributed all of the outstanding shares of
common stock of Comverse to CTI's shareholders. As a result of the Comverse share distribution, Comverse became an
independent public company and ceased to be a wholly owned subsidiary of CTI, and CTI ceased to have any material assets
other than its equity interest in us.
On February 4, 2013, we completed the CTI Merger. As a result of the CTI Merger, we have assumed certain rights and
liabilities of CTI, including any liability of CTI arising out of the Deutsch District Action and the Katriel District Action.
However, under the terms of the Distribution Agreement between CTI and Comverse relating to the Comverse share
distribution, we, as successor to CTI, are entitled to indemnification from Comverse for any losses we suffer in our capacity as
successor-in-interest to CTI in connection with the Deutsch District Action and the Katriel District Action.
Following an attempt to mediate the dispute, on July 1, 2014, the plaintiffs filed a notice with the District Court informing it
that the mediation process had been unsuccessful. As a result, the parties recently filed summations on the plaintiffs’ motion to
certify the suit as a class action, which are under consideration by the District Court.
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.
18. SEGMENT, GEOGRAPHIC, AND SIGNIFICANT CUSTOMER INFORMATION
Segment Information
Operating results by segment for the years ended January 31, 2015, 2014 and 2013 were as follows:
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(in thousands)
Revenue:
Enterprise Intelligence
Segment revenue
Revenue adjustments
Communications Intelligence
Segment revenue
Revenue adjustments
Video Intelligence
Segment revenue
Revenue adjustments
Total revenue
Segment contribution:
Enterprise Intelligence
Communications Intelligence
Video Intelligence
Total segment contribution
$
$
$
Unallocated expenses, net:
Amortization of acquired intangible assets
Stock-based compensation
Other unallocated expenses
Total unallocated expenses, net
Operating income
Other expense, net
Income before (benefit) provision for income taxes
$
Year Ended January 31,
2014
2013
2015
$
687,703
(29,032)
658,671
$
500,847
(1,946)
498,901
360,090
(695)
359,395
110,370
—
110,370
1,128,436
276,754
115,509
27,527
419,790
76,167
54,458
210,054
340,679
79,111
(57,708)
21,403
$
$
$
288,619
(616)
288,003
120,555
(167)
120,388
907,292
215,368
90,658
28,986
335,012
36,931
34,991
140,804
212,726
122,286
(58,971)
63,315
$
$
$
494,967
(4,489)
490,478
231,719
(2,112)
229,607
121,390
(1,933)
119,457
839,542
216,941
67,168
27,407
311,516
39,254
25,208
147,501
211,963
99,553
(31,789)
67,764
Revenue adjustments represent revenue of acquired companies which is included within segment revenue reviewed by the
CODM, but not recognizable within GAAP revenue. These adjustments primarily relate to the acquisition-date excess of the
historical carrying value over the fair value of acquired companies’ future maintenance and service performance obligations. As
the obligations are satisfied, we report our segment revenue using the historical carrying values of these obligations, which we
believe better reflects our ongoing maintenance and service revenue streams, whereas GAAP revenue is reported using the
obligations’ acquisition-date fair values.
With the exception of goodwill and acquired intangible assets, we do not identify or allocate our assets by operating segment.
Consequently, it is not practical to present assets by operating segment. There were no material changes in the allocation of
goodwill and acquired intangible assets by operating segment during the years ended January 31, 2015, 2014 and 2013. The
allocations of goodwill and acquired intangible assets by operating segment appear in Note 5, "Intangible Assets and
Goodwill".
Geographic Information
Revenue by major geographic region is based upon the geographic location of the customers who purchase our products. 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
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,
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2015, 2014 and 2013:
(in thousands)
Americas:
United States
Other
Total Americas
EMEA
APAC
Total revenue
Year Ended January 31,
2015
2014
2013
$
430,565
$
374,518
$
157,992
588,557
347,056
192,823
1,128,436
$
$
133,531
508,049
185,151
214,092
907,292
$
387,927
72,089
460,016
201,727
177,799
839,542
Our long-lived assets primarily consist of net property and equipment, goodwill and other intangible assets, capitalized
software development costs, deferred cost of revenue, 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, 2015, 2014 and 2013:
(in thousands)
United States
Israel
Other countries
Total property and equipment, net
Significant Customers
2015
January 31,
2014
$
$
24,966
20,064
17,460
62,490
$
$
18,921
14,320
6,904
40,145
$
$
2013
20,607
11,025
6,529
38,161
No single customer accounted for more than 10% of our revenue during the years ended January 31, 2015 and 2013. One
customer in our Communications Intelligence operating segment accounted for slightly more than 10% of our revenue during
the year ended January 31, 2014.
19. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized condensed quarterly financial information for the years ended January 31, 2015 and 2014 appears in the following
tables:
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(in thousands, except per share data)
Revenue
Gross profit
(Loss) income before (benefit) provision for income taxes
Net income (loss)
Net income (loss) attributable to Verint Systems Inc.
Net income (loss) attributable to Verint Systems Inc.
common shares:
for basic net income (loss) per common share
for diluted net income (loss) per common share
Net income (loss) per common share attributable to Verint
Systems Inc.
Basic
Diluted
(in thousands, except per share data)
Revenue
Gross profit
(Loss) income before provision for income taxes
Net (loss) income
Net (loss) income attributable to Verint Systems Inc.
Net (loss) income attributable to Verint Systems Inc.
common shares:
for basic net (loss) income per common share
for diluted net (loss) income per common share
Net (loss) income per common share attributable to Verint
Systems Inc.
Basic
Diluted
Three Months Ended
April 30,
2014
July 31,
2014
October 31,
2014
January 31,
2015
$
257,393
154,570
$
(13,269) $
$
28,819
$
27,956
276,816
174,261
$
$
(4,846) $
(10,380) $
(12,278) $
282,574
181,471
16,239
11,473
10,670
27,956
27,956
0.52
0.51
$
$
$
$
(12,278) $
(12,278) $
10,670
10,670
(0.21) $
(0.21) $
0.18
0.17
$
$
$
$
$
$
$
$
$
311,653
202,986
23,279
6,490
4,583
4,583
4,583
0.08
0.07
Three Months Ended
April 30,
2013
July 31,
2013
October 31,
2013
January 31,
2014
204,786
131,478
$
$
(4,834) $
(7,937) $
(9,153) $
222,447
149,840
21,314
18,505
17,536
(9,327) $
(9,327) $
17,536
17,536
(0.18) $
(0.18) $
0.33
0.33
$
$
$
$
$
$
$
$
$
224,314
152,157
30,011
24,054
22,487
22,487
22,487
0.42
0.42
$
$
$
$
$
$
$
$
$
255,745
167,397
16,824
24,154
22,887
22,887
22,887
0.43
0.42
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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.
Quarterly operating results for the year ended January 31, 2015 include:
•
•
•
an income tax benefit of $45.2 million in the three months ended April 30, 2014 resulting from the reduction of a valuation
allowance on our deferred income tax assets in connection with the acquisition of KANA;
a $7.1 million loss on early retirement of debt in the three months ended April 30, 2014 associated with an amendment to
our Credit Agreement, and
a $5.5 million loss on early retirement of debt in the three months ended July 31, 2014 associated with an the early partial
retirement of our February 2014 Term Loans and March 2014 Term Loans.
Quarterly operating results for the year ended January 31, 2014 include a $9.7 million loss on early retirement of debt in the
three months ended April 30, 2013 associated with an amendment to our Credit Agreement.
As is typical for many software and technology companies, our business is subject to seasonal and cyclical factors. 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
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quarter of the preceding year, 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.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management conducted an evaluation under the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, as of January 31, 2015. Disclosure controls and procedures are those controls and other
procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the
Exchange Act is recorded, processed, summarized, and reported, within the time periods specified by the rules and forms
promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As a result of this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective
as of January 31, 2015.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of January 31, 2015 based on the 2013 framework established in
Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Our internal control over financial reporting includes policies and procedures that provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in
accordance with GAAP.
In accordance with guidance issued by the Securities and Exchange Commission, companies are permitted to exclude
acquisitions from their final assessment of internal control over financial reporting for the first fiscal year in which the
acquisition occurred. Our management’s evaluation of internal control over financial reporting excluded the internal control
activities of KANA, which we acquired on February 3, 2014. We have included the financial results of KANA in our
consolidated financial statements from the date of acquisition. Total revenue subject to KANA's internal control over financial
reporting represented less than 13% of our consolidated revenue for the fiscal year ended January 31, 2015. Total assets subject
to KANA's internal control over financial reporting, excluding goodwill and intangible assets acquired from KANA,
represented less than 5% of our consolidated total assets at January 31, 2015. We are currently assessing the control
environment of this acquired business.
Based on the results of our evaluation, our management concluded that our internal control over financial reporting was
effective as of January 31, 2015. We reviewed the results of management’s assessment with our Audit Committee.
Our independent registered accounting firm, Deloitte & Touche LLP, has audited the effectiveness of our internal control over
financial reporting as stated in their report included herein.
Changes in Internal Control Over Financial Reporting
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There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) that occurred during the quarter ended January 31, 2015, that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure
controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system will be achieved. Further, the design of a control system must reflect the impact of resource constraints, and the benefits
of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent
limitations include the possibility that judgments in decision-making can be faulty, and that breakdowns can occur because of
simple errors. Additionally, controls can be circumvented by individual acts, by collusion of two or more people, or by
management override of the controls. The design of any system of controls also is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all
possible conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree
of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Verint Systems Inc.
Melville, New York
We have audited the internal control over financial reporting of Verint Systems Inc. and subsidiaries (the "Company") as of
January 31, 2015, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. As described in Management's Report on Internal Control Over
Financial Reporting, management excluded from its assessment the internal control over financial reporting at KANA Software
Inc. (together with its parent company and subsidiaries, “KANA”), which was acquired on February 3, 2014 and whose
financial statements constitute less than 13% of consolidated revenue and less than 5% of consolidated total assets excluding
goodwill and intangible assets acquired from KANA at January 31, 2015. Accordingly, our audit did not include the internal
control over financial reporting at KANA. The Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion
on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on that risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers, or persons performing similar functions, and effected by the company's
board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
January 31, 2015, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements as of and for the year ended January 31, 2015 of the Company and our report dated March
27, 2015 expressed an unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 27, 2015
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Item 9B. Other Information
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Except as set forth below, the information required by Item 10 will be included under the captions “Election of Directors”,
“Corporate Governance”, “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance" in our
definitive Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal
year ended January 31, 2015 (the "2015 Proxy Statement") and is incorporated herein by reference.
Corporate Governance Guidelines
All of our employees, including our executive officers, are required to comply with our Code of Conduct. Additionally, our
Chief Executive Officer, Chief Financial Officer, and senior officers must comply with our Code of Business Conduct and
Ethics for Senior Officers. The purpose of these corporate policies is to ensure to the greatest possible extent that our business
is conducted in a consistently legal and ethical manner. The text of the Code of Conduct and the Code of Business Conduct and
Ethics for Senior Officers is available on our website (www.verint.com). We intend to disclose on our website any amendment
to, or waiver from, a provision of our policies as required by law.
Item 11. Executive Compensation
The information required by Item 11 will be included under the captions “Executive Compensation” and “Compensation
Committee Interlocks and Insider Participation” in the 2015 Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Except as set forth below, the information required by Item 12 will be included under the caption “Security Ownership of
Certain Beneficial Owners and Management” in the 2015 Proxy Statement and is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information regarding our equity compensation plans as of January 31, 2015.
(a)
Number of
Securities to be
Issued upon
Exercise of
Outstanding
Options,
Warrants, and
Rights
(b)
Weighted-
Average
Exercise Price
of Outstanding
Options,
Warrants and
Rights (1)
(c)
Number of
Securities
Remaining
Available for
Future Issuance
under Equity
Compensation
Plans (Excluding
Securities
Reflected in
Column (a))
Plan Category
Equity compensation plans approved by security holders
2,607,309 (2)
$
28.74
5,163,351 (3)
Equity compensation plans not approved by security holders
—
—
Total
2,607,309
$
28.74
5,163,351
(1) The weighted-average price relates to outstanding stock options only (as of the applicable date). Other outstanding awards
carry no exercise price and are therefore excluded from the weighted-average price.
(2) Consists of 8,891 stock options and 2,598,418 restricted stock units.
(3) Excludes 265,316 shares available under the Vovici Corporation 2006 Amended and Restated Stock Plan, which plan was
assumed in connection with our acquisition of Vovici Corporation in 2011 and is not expected to be used for future awards.
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Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 will be included under the captions “Corporate Governance” and “Certain Relationships
and Related Person Transactions” in the 2015 Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by Item 14 will be included under the caption “Audit Matters” in the 2015 Proxy Statement and is
incorporated herein by reference.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report
(1) Financial Statements
The consolidated financial statements filed as part of this report are listed on the Index to Consolidated Financial Statements
in Part II, Item 8 of this Form 10-K.
(2) Financial Statement Schedules
All financial statement schedules have been omitted here because they are not applicable, not required, or the information is
shown in the consolidated financial statements or notes thereto.
(3) Exhibits
See (b) below.
(b) Exhibits
Number
Description
Agreement and Plan of Merger, dated August 12, 2012, by and among
Comverse Technology, Inc., Verint Systems Inc. and Victory Acquisition
I LLC*
Agreement and Plan of Merger, dated January 6, 2014, by and among
Verint Systems Inc., Kiwi Acquisition Inc., Kay Technology Holdings,
Inc. and Accel-KKR Capital Partners III, LP*
Distribution Agreement, dated as of October 31, 2012, by and between
Comverse Technology, Inc. and Comverse, Inc.
Tax Disaffiliation Agreement, dated as of October 31, 2012, by and
between Comverse Technology, Inc. and Comverse, Inc.
Filed Herewith /
Incorporated by
Reference from
Form 8-K filed on August 13, 2012
Form 8-K filed on January 6, 2014
Comverse, Inc. Current Report on
Form 8-K filed with the SEC on
November 2, 2012
Comverse, Inc. Current Report on
Form 8-K filed with the SEC on
November 2, 2012
Amended and Restated Certificate of Incorporation of Verint Systems
Inc.
Form S-1 (Commission File No.
333-82300) effective on May 16, 2002
Amended and Restated By-laws of Verint Systems Inc. (as amended as
of March 19, 2015)
Form 8-K filed on March 25, 2015
Amended and Restated Certificate of Designation, Preferences and
Rights of the Series A Convertible Perpetual Preferred Stock of Verint
Systems Inc.
Specimen Common Stock certificate
Form 10-Q filed on September 6, 2012
Form S-1 (Commission File No.
333-82300) effective on May 16, 2002
Specimen Series A Convertible Perpetual Preferred Stock certificate
Form 10-K filed on March 17, 2010
Indenture, dated as of June 18, 2014, between Verint Systems Inc. and
Wilmington Trust, National Association, as trustee.
First Supplemental Indenture, dated as of June 18, 2014, between Verint
Systems Inc. and Wilmington Trust, National Association, as trustee.
Form of Indemnification Agreement
Verint Systems Inc. Stock Incentive Compensation Plan (as amended
through December 12, 2002)
Amendment No. 1 to Verint Systems Inc. Stock Incentive Compensation
Plan (dated December 23, 2008)
Form 8-K filed on June 18, 2014
Form 8-K filed on June 18, 2014
Form S-1 (Commission File No.
333-82300) effective on May 16, 2002
Form 10-K filed on May 1, 2003
Form 10-K filed on March 17, 2010
123
2.1
2.2
2.3
2.4
3.1
3.2
3.3
4.1
4.2
4.3
4.4
10.1
10.2
10.3
Table of Contents
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
Amendment No. 2 to Verint Systems Inc. Stock Incentive Compensation
Plan (dated March 4, 2009)
Form 10-K filed on March 17, 2010
Verint Systems Inc. 2004 Stock Incentive Compensation Plan, as
amended and restated
Form 8-K filed on January 10, 2006
Amendment No. 1 to Verint Systems Inc. 2004 Stock Incentive
Compensation Plan, as amended and restated (dated December 23, 2008)
Form 10-K filed on March 17, 2010
Verint Systems Inc. 2010 Long-Term Stock Incentive Plan
Amendment No. 1 to Verint Systems Inc. 2010 Long-Term Stock
Incentive Plan
Form S-8 (Commission File No.
333-169768) effective on October 5,
2010
Form 8-K filed on June 19, 2012
Vovici Corporation Amended and Restated Stock Plan
Form 10-K filed on April 2, 2012
Amended and Restated Comverse Technology, Inc. 2011 Stock Incentive
Compensation Plan
Form S-8 (Commission File No.
333-189062) effective on June 3, 2013
Verint Systems Inc. Stock Bonus Program**
Filed herewith
Form of Stock Option Award Agreement**
Form 8-K filed on December 7, 2004
Form of Global Performance-Based Restricted Stock Unit Award**
Form 10-K filed on April 6, 2011
Form of Global Time-Based Restricted Stock Unit Award**
Form 10-K filed on April 6, 2011
Form of Performance-Based Restricted Stock Unit Award Agreement for
Grants Subsequent to March 2012**
Form of Time-Based Restricted Stock Unit Award Agreement for Grants
Subsequent to March 2012**
Form of Performance-Based Restricted Stock Unit Award Agreement for
Grants Subsequent to March 2013**
Form 10-K filed on April 2, 2012
Form 10-K filed on April 2, 2012
Form 10-K filed on March 28, 2013
Form of Time-Based Restricted Stock Unit Award Agreement for Grants
Subsequent to March 2013**
Form 10-K filed on March 28, 2013
Form of Special Performance-Based Restricted Stock Unit Award
Agreement for Grants Subsequent to March 2013*
Form 8-K filed on April 22, 2013
Form of Time-Based Restricted Stock Unit Award Agreement for Grants
Subsequent to March 2014**
Form 10-K filed on March 31, 2014
Form of Performance-Based Restricted Stock Unit Award Agreement for
Grants Subsequent to March 2014**
Form 10-Q filed on June 5, 2014
Form of Performance-Based Restricted Stock Unit Award Agreement for
Grants Subsequent to March 2015**
Filed herewith
Credit Agreement dated as of April 29, 2011 among Verint Systems Inc.,
as Borrower, the lenders from time to time party thereto, and Credit
Suisse AG, as administrative agent and collateral agent
Amendment and Restatement Agreement, dated as of March 6, 2013,
among Verint Systems Inc., the lenders party thereto, and Credit Suisse
AG, as administrative agent and collateral agent, including the Amended
and Restated Credit Agreement, dated as of March 6, 2013, among Verint
Systems Inc., as Borrower, the lenders from time to time party thereto,
and Credit Suisse AG, as administrative agent and collateral agent
attached as Exhibit A thereto
Amendment No. 1, Incremental Amendment and Joinder Agreement
dated February 3, 2014 to the Amended and Restated Credit Agreement,
dated as of March 6, 2013, among Verint Systems Inc., as Borrower, the
lenders from time to time party thereto, and Credit Suisse AG, as
administrative agent and collateral agent
Amendment No. 2, dated February 3, 2014 to the Amended and Restated
Credit Agreement, dated as of March 6, 2013, among Verint Systems
Inc., as Borrower, the lenders from time to time party thereto, and Credit
Suisse AG, as administrative agent and collateral agent
Form 8-K filed on May 2, 2011
Form 8-K filed on March 8, 2013
Form 8-K filed on February 3, 2014
Form 8-K filed on February 3, 2014
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Table of Contents
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
12.1
21.1
23.1
31.1
31.2
32.1
32.2
101.INS
Amendment No. 3, dated February 3, 2014 to the Amended and Restated
Credit Agreement, dated as of March 6, 2013, among Verint Systems
Inc., as Borrower, the lenders from time to time party thereto, and Credit
Suisse AG, as administrative agent and collateral agent
Amendment No. 4, dated March 7, 2014 to the Amended and Restated
Credit Agreement, dated as of March 6, 2013, among Verint Systems
Inc., as Borrower, the lenders from time to time party thereto, and Credit
Suisse AG, as administrative agent and collateral agent
Amendment No. 5, Incremental Amendment and Joinder Agreement
dated June 18, 2014 to the Amended and Restated Credit Agreement,
dated as of March 6, 2013, among Verint Systems Inc., as Borrower, the
lenders from time to time party thereto, and Credit Suisse AG, as
administrative agent and collateral agent.
Employment Agreement, dated February 23, 2010, between Verint
Systems Inc. and Dan Bodner**
Amended and Restated Employment Agreement, dated July 13, 2011,
between Verint Systems Inc. and Douglas Robinson**
Second Amended and Restated Employment Agreement, dated July 13,
2011, between Verint Systems Inc. and Elan Moriah**
Contract of Employment, dated July 10, 2011, by and among Meir
Sperling, Verint Systems Ltd., and Verint Systems Inc. **
Second Amended and Restated Employment Agreement, dated July 13,
2011, between Verint Systems Inc. and Peter Fante**
Form 8-K filed on February 3, 2014
Form 8-K filed on March 10, 2014
Form 8-K filed on June 18, 2014
Form 8-K filed on February 23, 2010
Form 8-K filed on July 14, 2011
Form 8-K filed on July 14, 2011
Form 8-K filed on July 14, 2011
Form 8-K filed on July 14, 2011
Summary of the Terms of Verint Systems Inc. Executive Officer Annual
Bonus Plan**
Filed herewith
Federal Income Tax Sharing Agreement, dated as of January 31, 2002,
between Comverse Technologies, Inc. an Verint Systems Inc.
Ratios of Earnings to Fixed Charges and Ratios of Earnings to Combined
Fixed Charges and Preference Security Dividends
Form S-1 (Commission File No.
333-82300) effective on May 16, 2002
Filed herewith
Subsidiaries of Verint Systems Inc.
Consent of Deloitte & Touche LLP, Independent Registered Public
Accounting Firm
Filed herewith
Filed herewith
Certification of Dan Bodner, Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Filed herewith
Certification of Douglas E. Robinson, Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer pursuant to Securities
Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350 (1)
Certification of the Chief Financial Officer pursuant to Securities
Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350 (1)
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
(1)
These exhibits are being "furnished" with this periodic report and are not deemed "filed" with the SEC and are not
incorporated by reference in any filing of the company under the Securities Act of 1933, as amended or the Securities Exchange Act of
1934, as amended.
* Certain exhibits and schedules have been omitted, and the company agrees to furnish supplementally to the SEC a copy of any
omitted exhibits or schedules upon request.
125
Table of Contents
** Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to
Item 15(b) of this report.
(c) Financial Statement Schedules
None
126
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 27, 2015
March 27, 2015
VERINT SYSTEMS INC.
/s/ Dan Bodner
Dan Bodner
President and Chief Executive Officer
/s/ Douglas E. Robinson
Douglas E. Robinson
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Dan Bodner
Dan Bodner
Chief Executive Officer and President, and Director
March 27, 2015
(Principal Executive Officer)
/s/ Douglas E. Robinson
Chief Financial Officer
March 27, 2015
Douglas E. Robinson
(Principal Financial Officer and Principal Accounting Officer)
/s/ Victor A. DeMarines
Chairman of the Board of Directors
March 27, 2015
Victor A. DeMarines
/s/ John R. Egan
John R. Egan
/s/ Larry Myers
Larry Myers
/s/ Richard Nottenburg
Richard Nottenburg
/s/ Howard Safir
Howard Safir
/s/ Earl Shanks
Earl Shanks
Director
Director
Director
Director
Director
127
March 27, 2015
March 27, 2015
March 27, 2015
March 27, 2015
March 27, 2015
EXHIBIT 10.11
Verint Systems Inc.
Stock Bonus Program
Originally Adopted: September 1, 2011
Revised: March 19, 2015
This document outlines the Verint Systems Inc. Stock Bonus Program (the “Stock Bonus Program”), under which participating
employees are eligible to receive a portion of their bonus in shares of Verint common stock rather than in cash.
Eligibility: The Stock Bonus Program is only being offered to selected employees at the discretion of management, including
employees on pre-established bonus plans and/or employees eligible to receive discretionary bonuses (discretionary bonus plans).
Executive officers may participate in the program, subject to the approval of the Company’s Board of Directors (the “Board”),
and subject to a one year vesting period (measured from the Value Date), solely with respect to the shares issued over and above
the number that would have been issued if the officer had purchased the shares at market price on the Value Date (the “Incentive
Shares”).
Summary: For eligible employees on bonus plans without a quarterly draw, the program will allow employees to make an election
to receive a specified portion of their annual bonus payout in the form of shares of Verint common stock. For eligible employees
on bonus plans with a quarterly draw or quarterly payouts, the program will allow employees to make an election to receive a
specified portion of their final bonus payout for the year in shares of Verint common stock; provided that (i) the participant will
in no event receive total cash and shares in excess of the amount of bonus actually earned and (ii) the Company may reduce the
number of shares delivered to a participant to the extent necessary to ensure that the participant does not receive duplicative
payments. Management will have discretion as to whether or not eligible employees on discretionary bonus plans will be required
to make an election (on the same basis as outlined above). In the event an election is not made, management will have discretion
to pay up to 75% of an employee’s discretionary bonus in shares of Verint common stock. The percentage elected by an employee
(or designated by management, in the case of employees on discretionary plans) is referred to herein as the “Election Percentage”.
If a participating employee changes to a non-bonus role after enrolling (or being enrolled) in the program for a given program
year, the Election Percentage will apply to any bonus earned by the employee prior to such change in role, with the timing of the
share delivery to be in accordance with the other terms and conditions of this document.
Incentive: As an incentive to participate in the program (including for eligible employees who do not make an election), the stock
price at which an employee’s bonus payout will be converted into shares of Verint common stock will be at a discount to market
price (as described below). The discount will be established by the Board on a year by year basis in conjunction with its annual
funding decision (as described below). The discount may fluctuate from year to year (the discount for a given year, expressed as
a percentage, the “Program Year Discount”) and will be reflected on the enrollment forms for each program year and also
communicated to participating employees who do not make an election.
Funding: Each year, the Board will consider an allocation of shares of Verint common stock to fund the Stock Bonus Program.
This allocation may fluctuate from year to year and in some years may be zero. As a result, the availability of the program in any
given year is subject to the Board’s decision to fund the program.
Maximum Number of Shares: In addition to (and subject to) the Board’s decision to fund the program in a given year, the Board
will also establish a maximum number of shares that are permitted to be delivered to participants in the program for that year (the
“Share Cap”). As a result, the Company reserves the right to reduce the number of shares delivered to each participant in order
to remain under the Share Cap, notwithstanding a participant’s Election Percentage. The Company will determine the manner in
which the Share Cap is applied, if needed.
Any amounts due to a participant that are not paid in shares due to the Board’s decision not to fund the program or due to the
Share Cap will instead be paid in cash at the original cash amount. 1
_________________________________________
1 This provision is not applicable to UK and Hong Kong employees. Please see the Country-Specific Addenda below.
Process: Prior to the scheduled delivery date of the shares, the HR and/or Finance departments will determine the amount of
bonus available to be converted into shares for each participant based on the participant’s Election Percentage. The number of
shares to be delivered to the participant will be calculated on the “Value Date” using the Company’s discounted stock price as of
the Value Date (rounded down to the nearest whole share.
• The scheduled delivery date will be specified on the enrollment form for the program year and is subject to change by
the Company. Please note that the scheduled delivery date may be different from (earlier or later than) the date that
cash bonuses are paid in such year. The scheduled delivery date will also be communicated to participating employees
who do not make an election.
• The Value Date will be the 5th trading day prior to the scheduled delivery date and will be specified on the enrollment
form for the program year (subject to change). The Value Date will also be communicated to participating employees
who do not make an election.
• The discounted stock price to be used for the conversion described above on the Value Date will be the average of the
closing prices of Verint’s common stock over the five trading days preceding the Value Date, minus the Program Year
Discount.
•
Subject to the requirements of local law and any other written agreement that may exist between the participant and
Verint:2 (1) the participant must be employed by Verint Systems Inc. or a subsidiary thereof on the Value Date to be
eligible to receive the shares scheduled to be delivered on the delivery date and (2) executive officers must be employed
by Verint Systems Inc. or a subsidiary thereof on the vesting date to be eligible to receive the Incentive Shares.
Notwithstanding the foregoing, if a participant is terminated without cause between the date the participant receives his
or her cash bonus for the program year (generally in April or May) and the Value Date (generally in June or July), the
Company will pay the participant the unpaid portion of his or her bonus in cash at the original cash amount.3
Enrollment and Elections:
Eligible employees (other than eligible employees on discretionary bonus plans who do not
make an election) wishing to participate in the Stock Bonus Program must complete and return the enrollment form for the program
year (which will be provided to eligible employees) to the Equity Administration team by the deadline specified in the enrollment
form, pursuant to the instructions on the enrollment form. Eligible employees (other than eligible employees on discretionary
bonus plans who do not make an election) who do not return the enrollment form by the specified deadline will not be enrolled
for that program year. Enrollment in the program will be done on a year by year basis and each year will require the completion
of a separate enrollment form. Employees may not enroll in the program while subject to a trading blackout. Please note that
once enrolled in the program for a particular year, participants may not cancel their enrollment or change their Election Percentage
for that year (unless the Company elects to re-open the enrollment window to permit changes to the Election Percentages).
The Company may, at its option, choose to provide for multiple enrollment windows during the course of the year based on the
number of shares available, however, employees who submit their enrollment forms during the first enrollment window of
the year will generally be given priority with respect to the Share Cap in the event the Company chooses to offer subsequent
enrollment windows.
In some countries, participants other than executive officers will be required as part of the enrollment form to make an irrevocable
election about whether they prefer, in the event they are subject to a trading blackout on the Value Date, to receive the shares as
scheduled or to revert to their original cash payment. If the enrollment form does not provide for such an election, or for executive
officers, subject to the other terms and conditions of the program, the participant will receive the shares as scheduled irrespective
of any trading blackout.
Eligible employees on discretionary bonus plans who do not make an election will not receive an enrollment form. Other than
for any such employees in the UK or Hong Kong (who will, subject to the other terms and conditions of the program, continue to
receive shares as scheduled), such employees will automatically revert to their original cash payment in the event they are subject
to a trading blackout on the Value Date.
_________________________________________
2 The preceding clause is not applicable to UK and Hong Kong employees. Please see the Country-Specific Addenda below.
3 This provision is not applicable to UK and Hong Kong employees. Please see the Country-Specific Addenda below.
Delivery and Taxes: Shares will be delivered to participants’ E*TRADE accounts on or about the scheduled delivery date (or
following the applicable vesting date, in the case of Incentive Shares for executive officers), subject to satisfaction of applicable
withholding taxes, if any. An account will be established at E*TRADE for participants who do not already have an account.
For employees subject to withholding taxes upon delivery of stock, the Company will automatically issue a net number of shares
to participants following (i) the sale of the required number of shares on the participants’ behalf for employees who are not in
blackout at such time or (ii) the withholding of the required number of shares from employees who are in blackout at such time.
There is no other option for paying withholding taxes under this program in connection with the delivery of shares. Withholding
taxes, if any, will be calculated based on the closing price of the Company’s common stock on the Value Date.
All shares will be issued under the Company’s 2010 Long-Term Stock Incentive Plan (the “2010 Plan”) and will be subject to the
terms and conditions thereof, including the administrative provisions thereunder, as applicable. A copy of the 2010 Plan and
related S-8 prospectus is available in the library on E*trade.com or upon request from the Equity Administration team. Consistent
with the Company’s Insider Trading Policy, participants who are subject to a trading blackout at the time the shares are delivered
will not be able to sell such shares until the blackout has been lifted.
Other Terms and Conditions: Enrollment in the Stock Bonus Program is not a guaranty of eligibility for the program in a
subsequent year or a guaranty of future employment. A participant’s right to receive a payment in shares under this program is
subject to the terms and conditions of the participant’s bonus plan and/or employment agreement, if any, and the requirement that
the participant be employed by Verint Systems Inc. or a subsidiary thereof on the Value Date and/or vesting date (as applicable).
Subject to the requirements of local law and any other written agreement that may exist between the participant and Verint,4
participants who terminate their employment prior to the Value Date (or vesting date, if applicable) for any reason will forfeit
any shares or cash payment otherwise payable hereunder on the corresponding delivery date or vesting date (if applicable).
Notwithstanding the foregoing, as noted above, if a participant is terminated without cause between the date the participant
receives his or her cash bonus for the program year (generally in April or May) and the Value Date (generally in June or July),
the Company will pay the participant the unpaid portion of his or her bonus in cash at the original cash amount.5
The Company and employee hereby acknowledge that each has requested that the present document be drafted in the English
language. Les parties reconnaissent avoir requis que le présent document soit rédigé en anglais.
Country-Specific Addenda - applicable to UK and Hong Kong employees only
In order to enroll in the Stock Bonus Program, employees in the UK and Hong Kong will be required to waive their right to receive
the portion of their bonus that they wish to receive in stock. This waiver is included in the UK and Hong Kong enrollment form.
It will be solely at the Board or Company’s discretion whether or not to (1) accept an employee’s application to waive the applicable
portion of his or her bonus and pay it in stock and (2) pay any portion of the waived amount in cash if there is an insufficient share
pool available due to the Board’s decision not to fund the program or due to the Share Cap.
The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise
caution in relation to the offer. If you are in any doubt about any of the contents of this document, you should obtain independent
professional advice.
WA R N I N G
_________________________________________
4 The preceding clause is not applicable to UK and Hong Kong employees. Please see the Country-Specific Addenda below.
5 This provision is not applicable to UK and Hong Kong employees. Please see the Country-Specific Addenda below.
EXHIBIT 10.22
___________ __, 20__
[Name of Recipient]
[Address]
Dear [Name]:
Notice of Grant of Performance-Based Restricted Stock Units
Congratulations! You have been granted a performance-based restricted stock unit award (the “Award”)
pursuant to the terms and conditions of the [Verint Systems Inc. 2010 Long-Term Stock Incentive Plan]
[Comverse Technology, Inc. 2011 Stock Incentive Compensation Plan (assumed by the Company)], as
modified by any sub-plan, addendum, or supplement applicable to you under Section 16 of the Agreement (as
defined below) (the “Plan”) and the attached Verint Systems Inc. (the “Company”) Performance-Based Restricted
Stock Unit Award Agreement (the “Agreement”). The details of your Award are specified below and in the attached
Agreement. Capitalized terms used in this Notice of Grant and not otherwise defined shall have the meanings given
in the Plan or the Agreement.
Granted To:
ID#:
[Name]
[ID Number]
Grant Date:
[____________], 20__
Target Number
of Units Granted:
[Number] (with the opportunity to earn up to
[Number] additional restricted stock units)
Price Per Unit:
U.S.$0.00
Performance Period:
[________]1 through [________]2
Vesting Schedule:
The restricted stock units granted hereby shall vest on the dates or at
the times set forth in the Agreement, following the achievement of
specified performance goals, but in any event, no earlier than
[________], 20__ with respect to the first [________] of the Earned
Units (if any) and no earlier than [________], 20__ with respect to the
remaining [________] of the Earned Units (if any).
Verint Systems Inc.
By my signature below or my electronic acceptance hereof (if provided to me electronically), I hereby
acknowledge my receipt of this Award granted on the date shown above, which has been issued to me under the
terms and conditions of the Plan and the Agreement. I agree that the Award is subject to all of the terms and
conditions of this Notice of Grant, the Plan, and the Agreement.
If I am a resident of Canada, I also acknowledge having requested that this Notice and all documents
referred to herein be drafted in the English language. Je reconnais également avoir exigé que ce document ainsi que
tout document auquel ce document fait référence, soient rédigés en langue anglaise.
Signature: _______________________________
Date: ______________
1 Not to exceed 100% of the Target Number of Units (or such lower percentage as specified by the grant resolutions).
2 Note that the maximum number of Restricted Stock Units granted is subject to the approval of the Compensation Committee.
VERINT SYSTEMS INC.
PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD AGREEMENT
This Performance-Based Restricted Stock Unit Award Agreement (this “Agreement”) and the [Verint Systems Inc.
2010 Long-Term Stock Incentive Plan][Comverse Technology, Inc. 2011 Stock Incentive Compensation Plan
(assumed by the Company)], as modified by any sub-plan, addendum, or supplement applicable to you under
Section 16 of this Agreement (the “Plan”) govern the terms and conditions of the Performance-Based Restricted
Stock Unit Award (the “Award”) specified in the Notice of Grant of Performance-Based Restricted Stock Units (the
“Notice of Grant”) delivered herewith entitling the person to whom the Notice of Grant is addressed (“Grantee”) to
receive from Verint Systems Inc. (the “Company”) the target number of performance-based restricted stock units
indicated in the Notice of Grant and the opportunity to earn additional restricted stock units (if provided for in the
Notice of Grant), as described herein, subject to the terms and conditions of this Agreement.
1
RESTRICTED STOCK UNITS; VESTING
1.1
Grant of Performance-Based Restricted Stock Units.
(a)
(b)
(c)
(d)
Subject to the terms of this Agreement, the Company hereby grants to Grantee the target number of
performance-based restricted stock units (as may be further defined under the terms of the Plan, “Restricted
Stock Units”) indicated in the Notice of Grant (the “Target Units”), and the opportunity to earn additional
Restricted Stock Units (if provided for in the Notice of Grant),3 as described herein, (the “Overachievement
Units”, and together with the Target Units, the “Total Units”), vesting of which depends in part upon the
Company’s performance during the performance period indicated in the Notice of Grant (the “Performance
Period”).
Subject to the terms of this Agreement, Grantee’s right to receive all or any portion of the Total Units will
be contingent upon the Company’s achievement of one or more performance goals specified in a
performance matrix attached as an exhibit to this Agreement (the “Performance Matrix”) measured over the
Performance Period.
The performance goal(s) and related “Target”, “Threshold”, and “Maximum” levels (as described below)
and any associated definitions for the Performance Period are memorialized in the Performance Matrix
attached as Exhibit A hereto.
If and when the Restricted Stock Units vest in accordance with the terms of the Plan, this Agreement, and
the Notice of Grant without forfeiture, and upon the satisfaction of all other applicable conditions as to the
Restricted Stock Units, one Share shall be issuable to Grantee for each Restricted Stock Unit that vests on
such date, which Shares, except as otherwise provided herein or in the Notice of Grant, will be free of any
Company-imposed transfer restrictions. Any fractional Restricted Stock Unit remaining after the Award is
fully vested shall be discarded and shall not be converted into a fractional Share.
1.2
Achievement of Payout Percentages and Vesting of Performance-Based Restricted Stock Units.
(a)
Below Threshold. If upon conclusion of the Performance Period, achievement of a performance goal falls
below the “Threshold” level for such performance goal, as set forth in the Performance Matrix, a payout
percentage of 0% in respect of such performance goal shall be achieved.
3 Note that the maximum number of Restricted Stock Units granted is subject to the approval of the Compensation Committee.
(b)
(c)
(d)
(e)
(f)
(g)
At a Level or Between Levels. If, upon conclusion of the Performance Period, achievement of a
performance goal equals a specified level for such performance goal as set forth in the Performance Matrix
(other than the “Maximum” level), the payout percentage specified for such level in the Performance
Matrix shall be achieved. If, upon conclusion of the Performance Period, achievement of a performance
goal exceeds a specified level for such performance goal as set forth in the Performance Matrix but is
below the next specified level (e.g., above the “Threshold” level but less than the “Target” level or above
the “Target” level but less than the “Maximum” level), the payout percentage shall be calculated on a linear
basis based on (i) where the actual achievement of such performance goal falls between the two nearest
specified levels as set forth in the Performance Matrix and (ii) the corresponding payout percentages
specified in the Performance Matrix. Notwithstanding the foregoing, if, upon conclusion of the
Performance Period, achievement of such performance goal exceeds the “Target” level (but is less than the
“Maximum” level) the payout percentage in respect of such performance goal shall only exceed the payout
percentage specified for the Target level if the Notice of Grant indicates that Overachievement Units are
eligible to be earned.
Equals or Exceeds Maximum. If the Notice of Grant indicates that Overachievement Units are eligible to
be earned, and upon conclusion of the Performance Period, achievement of a performance goal equals or
exceeds the “Maximum” level for such performance goal, as set forth in the Performance Matrix, the
payout percentage indicated on the Performance Matrix for “Maximum” performance in respect of such
performance goal shall be achieved.
Vesting of Units; Independence of Performance Goals. Subject to Section 1.2(e), the number of Restricted
Stock Units that will vest in respect of the Performance Period shall, unless otherwise specified in the
Performance Matrix, be determined by multiplying the “combined average payout percentage achieved” by
the number of Target Units eligible to be earned. The “combined average payout percentage achieved”
shall, unless otherwise specified in the Performance Matrix, be the quotient of (A) and (B), where (A) is the
sum of the actual payout percentages achieved for each performance goal, and (B) is the number of
performance goals. If the foregoing calculation would result in the vesting of a fraction of a Restricted
Stock Unit, the result of the calculation will be rounded down to the nearest whole Restricted Stock Unit.
Determination of Earned Award. Not later than 60 days following the Board’s receipt of the Company’s
audited financial statements covering all years during the Performance Period, the Committee will
determine (i) whether and to what extent the performance goal(s) have been satisfied, (ii) the number of
Restricted Stock Units vesting hereunder pursuant to the terms hereof (the “Earned Units”), and (iii)
whether all other conditions to receipt of the Shares have been met. The Committee’s determination of the
foregoing shall be final and binding on Grantee absent a showing of manifest error. Notwithstanding any
other provision of this Agreement, no Restricted Stock Units shall vest (x) until the Committee has made
the foregoing determinations for the Performance Period and (y) prior to the date or dates discussed in the
next paragraph.
Time Vesting Limitation. For the avoidance of doubt, notwithstanding the determination of the Board or
the Committee pursuant to the previous paragraph, no Restricted Stock Units will vest prior to the date or
dates specified in the Notice of Grant.
Other Vesting Provisions. Any Restricted Stock Units that do not become vested based on the foregoing
provisions will be automatically forfeited by Grantee without consideration.
1.3
Forfeiture.
(a)
Except as otherwise provided herein, Grantee’s right to receive any of the Restricted Stock Units is
contingent upon his or her remaining in the Continuous Service of the Company or a Subsidiary or Affiliate
through the respective vesting dates specified in the Notice of Grant and hereunder. If Grantee’s
Continuous Service terminates for any reason, all Restricted Stock Units which are then unvested shall,
unless otherwise determined by the Board or the Committee in its sole discretion or subject to a separate
written agreement between the parties, be cancelled and the Company shall thereupon have no further
obligation thereunder. For the avoidance of doubt, subject to a separate written agreement between the
parties, Grantee acknowledges and agrees that he or she has no expectation that any Restricted Stock Units
will vest on the termination of his or her Continuous Service for any reason and that he or she will not be
entitled to make a claim for any loss occasioned by such forfeiture as part of any claim for breach of his or
her employment or service contract or otherwise.
1.4
Delivery.
(a)
(b)
Subject to Section 1.6 and any other applicable conditions hereunder, as soon as administratively
practicable following the vesting of Restricted Stock Units in accordance with the terms of this Agreement
and the Notice of Grant (but in no event later than the date the short-term deferral period under Section
409A of the Code expires with respect to such vested Shares), the Company shall issue the applicable
Shares and, at its option, (i) deliver or cause to be delivered to Grantee a certificate or certificates for the
applicable Shares or (ii) transfer or arrange to have transferred the Shares to a brokerage account of Grantee
designated by the Company.
Notwithstanding the foregoing, the issuance of Shares upon the vesting of a Restricted Stock Unit shall be
delayed in the event the Company reasonably anticipates that the issuance of Shares would constitute a
violation of U.S. federal securities laws, other applicable law, or Nasdaq rules. If the issuance of the Shares
is delayed by the provisions of this paragraph, such issuance shall occur at the earliest date at which the
Company reasonably anticipates issuing the Shares will not cause such a violation. For purposes of this
paragraph, the issuance of Shares that would cause inclusion in gross income or the application of any
penalty provision or other provision of the Code or other tax legislation applicable to Grantee is not
considered a violation of applicable law.
1.5
Restrictions.
(a)
Except as provided herein, Grantee shall not have any rights as a stockholder with respect to any Shares to
be distributed under this Agreement until he, she or it has become the holder of such Shares as provided in
this Agreement.
(b)
The Award is subject to the transferability restrictions under the Plan.
1.6
Tax; Withholding.
(a)
(b)
The Company shall determine the amount of any withholding or other tax required by law to be withheld or
paid by the Company or its Subsidiary with respect to any income recognized by Grantee with respect to
the Restricted Stock Units or the issuance of Shares pursuant to the terms of the Restricted Stock Units.
Neither the Company nor any Subsidiary, Affiliate or agent makes any representation or undertaking
regarding the treatment of any tax or withholding in connection with the grant, vesting or settlement of the
Award or the subsequent sale of Shares subject to the Award. The Company and its Subsidiaries and
Affiliates do not commit and are under no obligation to structure the Award to reduce or eliminate
Grantee’s tax liability and none of the Company, any of its Subsidiaries or Affiliates, or any of their
employees or representatives shall have any liability to Grantee with respect thereto.
(c)
Notwithstanding the withholding provision in the Plan:
(i)
(ii)
If in the tax jurisdiction in which Grantee resides, a tax withholding obligation arises upon vesting
of the Award (regardless of when the Shares underlying the Award are delivered to Grantee), or for
non-employee directors of the Company in any jurisdiction, on each date that all or a portion of
the Award actually vests, if (1) the Company does not have in place an effective registration
statement under the Securities Act of 1933, as amended (the “Securities Act”) and there is not a
Securities Act exemption available under which Grantee may sell Shares or (2) Grantee is subject
to a Company-imposed trading blackout, then unless Grantee has made other arrangements
satisfactory to the Company, the Company will (x) with respect to employees of the Company,
withhold from the Shares to be delivered to Grantee such number of Shares as are sufficient in
value (as determined by the Company in its sole discretion) to cover the minimum amount of the
tax withholding obligation and (y) with respect to non-employee directors of the Company, settle
40% of the portion of the Award then vesting in cash by paying Grantee cash (in accordance with
the Company’s normal payroll practices) equal to the Fair Market Value of one Share for each
Restricted Stock Unit being settled in such manner.
If in the tax jurisdiction in which Grantee resides a tax withholding obligation arises upon delivery
of the Shares underlying the Restricted Stock Units (regardless of when vesting occurs), then
following each date that all or a portion of the Award actually vests, the Company will defer the
delivery of the Shares otherwise deliverable to Grantee until the earliest of (1) the date Grantee’s
employment with the Company (or a Subsidiary or Affiliate) is terminated (by either party), (2) the
date that the short-term deferral period under Section 409A of the Code expires with respect to
such vested Shares, or (3) the date on which the Company has in place an effective registration
statement under the Securities Act or there is a Securities Act exemption available under which
Grantee may sell Shares and on which Grantee is not subject to a Company-imposed trading
blackout (the earliest of such dates, the “Delivery Date”). If on the Delivery Date (x) the
Company does not have in place an effective registration statement under the Securities Act and
there is not a Securities Act exemption available under which Grantee may sell Shares or (y)
Grantee is subject to a Company-imposed trading blackout, then unless Grantee has made other
arrangements satisfactory to the Company, the Company will withhold from the Shares to be
delivered to Grantee such number of Shares as are sufficient in value (as determined by the
Company in its sole discretion) to cover the minimum amount of the tax withholding obligation.
(d)
(e)
Grantee is ultimately liable and responsible for all taxes owed by Grantee in connection with the Award,
regardless of any action the Company or any of its Subsidiaries, Affiliates or agents takes with respect to
any tax withholding obligations that arise in connection with the Award. Accordingly, Grantee agrees to
pay to the Company or its relevant Subsidiary, Affiliate or agent as soon as practicable, including through
additional payroll withholding (if permitted under applicable law), any amount of required tax withholding
that is not satisfied by any such action of the Company or its Subsidiary, Affiliate or agent.
The Committee shall be authorized, in its sole discretion, to establish such rules and procedures relating to
the use of Shares of common stock to satisfy tax withholding obligations as it deems necessary or
appropriate to facilitate and promote the conformity of Grantee’s transactions under this Agreement with
Rule 16b-3 under the Securities Exchange Act of 1934, as amended, if such rule is applicable to
transactions by Grantee.
Detrimental Activity. In the event the Company determines or discovers during or after the course of
1.7
Grantee’s employment or service that Grantee committed an act during the course of employment or service that
constitutes or would have constituted Cause for termination, the Committee shall have the right, to the maximum
extent permissible under applicable law, to cancel all or any portion of the Award (whether or not vested).
1.8
Erroneously Awarded Compensation. The Award, if and to the extent subject to the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010, may be subject to a claw back policy or other incentive compensation
policy established from time to time by the Company to comply with such Act.
2
CERTAIN DEFINITIONS
Defined terms not defined in this Agreement but defined in the Plan shall have the same definitions as in the Plan. For
the avoidance of doubt, in each instance that the term “Company” is used in the Plan, “Company” shall mean Verint
Systems Inc.
3
REPRESENTATIONS OF GRANTEE
Grantee hereby represents to the Company that Grantee has read and fully understands the provisions of this Agreement,
and Grantee acknowledges that Grantee is relying solely on his or her own advisors with respect to the tax consequences
of the Award. Grantee acknowledges that this Agreement has not been reviewed or approved by any regulatory authority
in his or her country of residence or otherwise.
4
NOTICES
All notices or communications under this Agreement shall be in writing, addressed as follows:
To the Company:
Verint Systems Inc.
330 South Service Road
Melville, NY 11747-3201
U.S.A.
+(631) 962-9600 (phone)
+(631) 962-9623 (fax)
Attn: Chief Legal Officer
To Grantee:
as set forth in the Company’s payroll
records
Any such notice or communication shall be (a) delivered by hand (with written confirmation of receipt) or sent by a
nationally recognized overnight delivery service (receipt requested) or (b) sent certified or registered mail, return receipt
requested, postage prepaid, addressed as above (or to such other address as such party may designate in writing from
time to time), and the actual date of receipt shall determine the time at which notice was given. Grantee will promptly
notify the Company in writing upon any change in Grantee’s mailing address or e-mail address.
5
BINDING AGREEMENT
This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of Grantee and the assigns
and successors of the Company.
6
ENTIRE AGREEMENT; AMENDMENT
The Plan, this Agreement and the Notice of Grant represent the entire agreement of the parties with respect to the subject
matter hereof. Subject to the terms of the Plan, the Committee may waive any conditions or rights under, amend any
terms of, or alter, suspend, discontinue, cancel or terminate, the Award; provided that any such waiver, amendment,
alteration, suspension, discontinuance, cancellation or termination that would impair the rights of Grantee or any holder
or beneficiary of the Award previously granted shall not be effective as to Grantee without the written consent of
Grantee, holder or beneficiary, but further provided that the consent of Grantee or any holder or beneficiary shall not
be required to an amendment that is deemed necessary by the Company to ensure compliance with (a) the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 or any regulations promulgated thereunder (collectively the
“Dodd-Frank Act”), including, without limitation, as a result of the implementation of any recoupment policy the
Company adopts to comply with the requirements set forth in the Dodd-Frank Act and (b) Section 409A of the Code
as amplified by any Internal Revenue Service or U.S. Treasury Department regulations or guidance, or any other
applicable equivalent tax law, rule, or regulation, as the Company deems appropriate or advisable.
7
GOVERNING LAW
The rules and regulations relating to this Agreement shall be determined in accordance with the laws of the State of
New York, applied without giving effect to its conflict of laws principles. Each party to this Agreement hereby consents
and submits himself, herself or itself to the jurisdiction of the courts of the state of New York for the purposes of any
legal action or proceeding arising out of this Agreement. Nothing in this Agreement shall affect the right of the Company
to commence proceedings against Grantee in any other competent jurisdiction, or concurrently in more than one
jurisdiction, or to serve process, pleadings and other papers upon Grantee in any manner authorized by the laws of any
such jurisdiction. Grantee irrevocably waives:
(a)
action, suit or proceeding in any court referred to in this Section; and
any objection which he, she or it may have now or in the future to the laying of the venue of any
(b)
any claim that any such action, suit or proceeding has been brought in an inconvenient forum.
8
SEVERABILITY
If any provision of this Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction
or as to any person or this Agreement, or would disqualify this Agreement under any law deemed applicable by the
Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be
construed or deemed amended without, in the determination of the Committee, materially altering the intent of this
Agreement, such provision shall be stricken as to such jurisdiction, person or this Agreement and the remainder of this
Agreement shall remain in full force and effect.
9
ONE-TIME GRANT; NO RIGHT TO CONTINUED SERVICE OR PARTICIPATION; EFFECT
ON OTHER PLANS
The Award evidenced by this Agreement is a voluntary, discretionary bonus being made on a one-time basis and it
does not constitute a commitment to make any future awards, even if awards have been made repeatedly in the past.
Further, the Award is made outside the scope of Grantee’s employment or service contract, if any, unless otherwise
expressly provided therein. Neither this Agreement nor the Notice of Grant shall be construed as giving Grantee the
right to be retained in the employ of, or in any consulting or other service relationship to, or as a director on the
Board or board of directors, as applicable, of, the Company or any Subsidiary or Affiliate of the Company. Further,
the Company or a Subsidiary or Affiliate of the Company may at any time dismiss Grantee from employment or
discontinue any consulting or other service relationship, free from any liability or any claim under the Plan or this
Agreement, unless otherwise expressly provided in the Plan, this Agreement or any applicable employment or
service contract or agreement. In the event that Grantee is not an employee of the Company, the grant of the Award
will not be interpreted to form an employment contract or relationship with the Company; and furthermore, the grant
of the Award will not be interpreted to form an employment contract with the Company or any Affiliate or
Subsidiary of the Company. Payment received by Grantee pursuant to this Agreement and the Notice of Grant shall
not be considered part of normal or expected compensation or salary for any purpose, including, but not limited to,
calculation of any overtime, severance, resignation, termination, redundancy, end of service payments, bonuses,
long-service awards, pension or retirement benefits or similar payments and shall not be included in the
determination of benefits under any pension, group insurance or other benefit plan of the Company or any
Subsidiary or Affiliate in which Grantee may be enrolled, except as provided under the terms of such plans, or as
determined by the Board.
10
NATURE OF THE GRANT
In accepting the Award, Grantee acknowledges that:
(a)
the Plan is established voluntarily by the Company, it is discretionary in nature and may
be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan
or this Agreement;
(b)
(c)
certainty;
Grantee’s participation in the Plan is voluntary;
the future value of the underlying Shares is unknown and cannot be predicted with
(d)
if Grantee receives Shares upon vesting of the Award, the value of such Shares may
increase or decrease in value; and
(e)
in consideration of the grant of the Award, no claim or entitlement to compensation or
damages arises from diminution in value of the Award received upon vesting of the Award or, except as otherwise
provided herein or under a separate agreement between the parties, from the termination of the Award resulting from
termination of Grantee’s Service to the Company or a Subsidiary or Affiliate (for any reason whatsoever and
whether or not in breach of local labor laws) and, subject to the foregoing, Grantee irrevocably releases the
Company and its Subsidiaries and Affiliates from any such claim that may arise; if, notwithstanding the foregoing,
any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, Grantee
shall be deemed irrevocably to have waived his, her or its entitlement to pursue such claim.
11
NO STRICT CONSTRUCTION
No rule of strict construction shall be implied against the Company, the Committee, or any other person in the
interpretation of any of the terms of this Agreement, the Notice of Grant or any rule or procedure established by the
Committee.
12
USE OF THE WORD “GRANTEE”
Wherever the word “Grantee” is used in any provision of this Agreement under circumstances where the provision
should logically be construed to apply to the executors, the administrators, or the person or persons to whom the
Restricted Stock Units may be transferred by will or the laws of descent and distribution, the word “Grantee” shall be
deemed to include such person or persons.
13
FURTHER ASSURANCES
Grantee agrees, upon demand of the Company or the Committee, to do all acts and execute, deliver and perform all
additional documents, instruments and agreements which may be reasonably required by the Company or the Committee,
as the case may be, to implement the provisions and purposes of this Agreement.
14
CONSENT TO TRANSFER PERSONAL DATA
The Company and its Subsidiaries hold certain personal information about Grantee, that may include Grantee’s
name, home address and telephone number, date of birth, social security number or other employee identification
number, salary, nationality, job title, any Shares of stock held in the Company, or details of any entitlement to Shares
of stock awarded, canceled, purchased, vested, or unvested, for the purpose of implementing, managing, and
administering the Award, the Plan or this Agreement (collectively “Data”). Grantee hereby agrees that the
Company and/or its Subsidiaries may transfer Data amongst themselves as necessary for the purpose of
implementation, administration, and management of Grantee’s participation in the Award, the Plan or this
Agreement, and the Company and/or any of its Subsidiaries may each further transfer Data to any third parties
assisting the Company in the implementation, administration, and management of the Award, the Plan or this
Agreement. These recipients may be located throughout the world, including, without limitation, outside Grantee’s
country of residence (or outside of the European Economic Area, for Grantees located within the European
Economic Area). Such countries may not provide for a similar level of data protection as provided for by local law
(such as, for example, European privacy directive 95/46/EC and local implementations thereof). Grantee hereby
authorizes those recipients - even if they are located in a country outside of Grantee’s country of residence (and/or
outside of the European Economic Area, for Grantees located within the European Economic Area) - to receive,
possess, use, retain, and transfer the Data, in electronic or other form, for the purpose of implementing,
administering, and managing Grantee’s participation in the Award, the Plan or this Agreement, including but not
limited to any transfer of such Data as may be required for the administration of the Award, the Plan or this
Agreement and/or the subsequent holding of Shares of stock on Grantee’s behalf by a broker or other third party
with whom Grantee or the Company may elect to deposit any Shares of stock acquired pursuant to the Award, the
Plan or this Agreement. Grantee is not obliged to consent to such collection, use, processing and transfer of
personal data and may, at any time, review Data, require any necessary amendments to it, or withdraw the consent
contained in this Section by contacting the Company in writing. However, withdrawing or withholding consent may
affect Grantee’s ability to participate in the Award, the Plan or this Agreement. More information on the Data and/
or the consequences of withholding or withdrawing consent can be obtained from the Company’s legal department.
15
GOVERNING PLAN DOCUMENT
This Agreement is subject to all the provisions of the Plan, the provisions of which are hereby made a part of this
Agreement, and is further subject to all interpretations, amendments, rules and regulations which may from time to
time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this
Agreement and those of the Plan, the provisions of the Plan control.
16
CERTAIN COUNTRY-SPECIFIC PROVISIONS
For residents of the UK only:
Your Award is subject to the UK Sub-Plan under the Plan.
Grantee agrees, as a condition to its acceptance of the Award, to satisfy any requirement of the Company or any
Subsidiary that, prior to vesting of all or any part of the Award, Grantee enter into a joint election under section 431
(1) of the UK Income Tax (Earnings and Pensions) Act 2003, the effect of which is that the Shares issued on vesting
will be treated as if they were not restricted securities.
Tax withholding obligations under this Agreement shall include, without limitation:
(i)
United Kingdom (UK) income tax; and
(ii)
UK primary class 1 (employee's) national insurance contributions.
For residents of Canada only:
Your Award is subject to the Canadian Sub-Plan under the Plan.
I acknowledge having requested that this Agreement and all documents referred to herein be drafted in the English
language. Je reconnais également avoir exigé que ce document ainsi que tout document auquel ce document fait
référence, soient rédigés en langue anglaise.
Tax withholding obligations under this Agreement shall include federal and provincial income tax, Canadian
Pension Plan contributions, and Employment Insurance premiums (including the provincial equivalents) as
applicable.
For residents of Hong Kong only:
a) The Data Protection Principles specified in the Personal Data (Privacy) Ordinance (Cap. 486 of the Laws of
Hong Kong) will apply to any Data upon its transfer to any place outside of Hong Kong.
b) Hong Kong Securities Law Notice. The Restricted Stock Units and any Shares issued pursuant to the Awards do
not constitute a public offering of securities under Hong Kong law and are available to any eligible person under the
Plan. The Agreement, the Plan and other incidental communication materials (together, the “Award Agreement”)
have not been prepared in accordance with and are not intended to constitute a “prospectus” for a public offering of
securities under the applicable securities legislation in Hong Kong. The Restricted Stock Units and any related
documentation are intended only for the personal use of each eligible person under the Plan and may not be
distributed to any other person. The contents of the Award Agreement, including the Plan, have not been reviewed
by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in
any doubt about any of the contents of the Award Agreement or the Plan, you should obtain independent
professional advice.
For residents of Russia only:
You acknowledge that the grant of Restricted Stock Units, the Plan and all other materials you may receive
regarding participation in the Plan do not constitute an advertising or offering of securities in Russia. The issuance
of securities pursuant to the Plan has not and will not be registered in Russia and therefore, the securities described
in any Plan-related documents may not be used for offering or public circulation in Russia.
You further acknowledge that in no event will Shares that may be issued to you with respect to the Restricted Stock
Units be delivered to you in Russia; all Shares issued to you with respect to the Restricted Stock Units will be
maintained on your behalf in the United States.
For residents of Argentina only:
Neither the award under the plan nor the underlying shares are publicly offered or listed on any stock exchange in
Argentina. The offer is private and not subject to the supervision of any Argentine governmental authority.
For residents of Israel only:
By my signature on or electronic acceptance of this Agreement, I acknowledge that the Award is granted under and
governed by (i) this Agreement, (ii) the Plan, a copy of which has been provided to me or made available for my
review, (iii) the Israeli Supplement (“the Supplement”), a copy of which has been provided to me or made available
for my review; (iv) Section 102(b)(2) of the Income Tax Ordinance (New Version) – 1961 and the Rules
promulgated in connection therewith, and (v) the Trust Agreement, a copy of which has been provided to me or
made available for my review. Furthermore, by my signature on or electronic acceptance of this Agreement, I agree
that the Awards will be issued to the Trustee to hold on my behalf, pursuant to the terms of the Section 102, the
Section 102 Rules and the Trust Agreement.
In addition, by my signature on or electronic acceptance of this Agreement, I confirm that I am familiar with the
terms and provisions of Section 102, particularly the Capital Gains Track described in subsection (b)(2) thereof, and
I agree that I will not require the Trustee to release the Awards or Company shares to me, or to sell the Awards or
Company shares to a third party, during the Holding Period, unless permitted to do so by applicable law.
All capitalized terms in this undertaking shall have the meaning granted to them under the Supplement.
For residents of India only:
Your Award is subject to the India Addendum to the Plan.
END OF AGREEMENT
EXHIBIT A
Performance Matrix
Performance Equity Award Granted [_______], 20__
Performance Period from [________] to [ ]
Target Units for Performance Period: ______________
Total Units for Performance Period: ______________
Revenue Achieved in Performance Period4
Revenue Payout Percentage in Performance Period
Threshold ([__]% of Revenue Target)
Target (100% of Revenue Target)
Maximum ([__]% of Revenue Target)
[__]%
[__]%
[__]%5
EBITDA Achieved in Performance Period6
EBITDA Payout Percentage in Performance Period
Threshold ([__]% of EBITDA Target)
Target (100% of EBITDA Target)
Maximum ([__]% of EBITDA Target)
[__]%
[__]%
[__]%7
Relative TSR Achieved in Performance Period
Relative TSR Payout Percentage in Performance
Period
Threshold (25th or < percentile Relative TSR)
Target (50th percentile Relative TSR)
Maximum (75th or > percentile Relative TSR)
[__]%
[__]%
[__]%
“Relative TSR” means the Company’s total stockholder return, on a percentile basis, relative to the
companies comprising the S&P 1500 Information Technology Sector Index (the “Index”) with respect to
the Performance Period, weighted equally and based on the applicable 90-day volume-weighted trailing
average closing prices of such constituent companies as of the beginning and end of the Performance
Period; provided that members of the Index will only be taken into account for purposes of the calculation
of Relative TSR if they constitute part of the Index at both the beginning and the end of the Performance
Period.
4 May include more than three data points.
5 If the Notice of Grant does not make Overachievement Units available for over-performance, replace this line of the
table with “Maximum: Not Applicable”.
6 May include more than three data points.
7 If the Notice of Grant does not make Overachievement Units available for over-performance, replace this line of the
table with “Maximum: Not Applicable”.
EXHIBIT 10.35
Summary of the Terms of Verint Systems Inc. Executive Officer Annual Bonus Plan
Verint Systems Inc. (the “Company”) maintains an annual bonus program (the “AIP”) for its executive officers. Under
the AIP, each executive officer is eligible to receive an annual cash bonus upon the satisfaction of pre-determined performance
goals, however, the Company may reserve the right to pay some or all of the bonus in shares of our common stock. The target
bonus under the AIP is established annually by the Compensation Committee of the Company’s Board of Directors (the
“Committee”) as part of the Committee’s regular compensation review process and is paid following certification by the
Committee of the achievement of the underlying performance goals. In establishing target bonuses, in addition to the factors
considered as part of the compensation review process generally, the Committee also considers the target bonus set forth in the
executive officer’s employment agreement (if applicable), as well as special achievements, promotions, and other facts and
circumstances specific to the individual officer.
The performance goals under the AIP are based on revenue, a measure of profitability, and a measure of cash
generation and are expressed on a non-GAAP basis. In the case of executive officers with direct responsibility for a specific
operating unit, unit revenue and unit profitability goals may also be incorporated into the executive officer’s performance goals.
In addition to company-wide performance goals (or if applicable, unit-based goals), a portion of the target bonus is also tied to
the achievement of non-financial management business objectives (MBOs) approved by the Committee. The financial
performance goals established by the Committee generally come in the form of a range, wherein the executive officer may
achieve a percentage of his or her target bonus at the low end of the performance range (or threshold), 100% of his target bonus
towards the middle of the performance range (target performance), and up to 200% of his target bonus at the high end of the
performance range.
EXHIBIT 12.1
Verint Systems Inc. and Subsidiaries
Ratios of Earnings to Fixed Charges
and
Ratios of Earnings to Combined Fixed Charges and Preference Security Dividends
(in thousands, except ratios)
Earnings:
Year Ended January 31,
2015
2014
2013
2012
2011
Income before provision (benefit) for income taxes
$ 21,403
$ 63,315
$ 67,764
$ 46,157
$ 38,525
Add: Fixed charges
42,151
34,330
35,900
37,423
34,063
Subtract: Noncontrolling interest in pre-tax income of
subsidiaries
(6,293)
$ 57,261
(6,081)
$ 91,564
(5,783)
$ 97,881
(4,376)
$ 79,204
(3,632)
$ 68,956
Fixed Charges and Preference Security Dividends:
Interest expense, including amortization of discounts
$ 27,529
$ 27,119
$ 27,544
$ 29,237
$ 27,109
Amortization of deferred debt-related costs
Interest component of rent expense
Total Fixed Charges
Dividends on convertible preferred stock (pre-tax)
Total Fixed Charges and Preference Security Dividends
9,133
5,489
2,662
4,549
42,151
34,330
—
211
3,489
4,867
35,900
18,883
3,120
5,066
37,423
18,118
2,788
4,166
34,063
17,433
$ 42,151
$ 34,541
$ 54,783
$ 55,541
$ 51,496
Ratio of Earnings to Fixed Charges
Ratio of Earnings to Fixed Charges and Preference
Security Dividends
1.4
1.4
2.7
2.7
2.7
1.8
2.1
1.4
2.0
1.3
Earnings consists of our consolidated net income before income taxes, plus fixed charges, reduced by the non-controlling
interest in the pre-tax income of a consolidated subsidiary that did not incur fixed charges. Fixed charges consist of interest
expense (including only interest expense on third party indebtedness and excluding interest expense accrued on uncertain tax
positions), amortization of debt discounts and capitalized expenses related to indebtedness as well as a portion of rental expense
deemed by us to be representative of the interest factor within rental payments under operating leases. Preference security
dividends represent the estimated amount of pre-tax earnings necessary to pay dividends on our previously outstanding Series A
Convertible Preferred Stock. Dividends on our Series A Convertible Preferred Stock were cumulative. Our Series A Convertible
Preferred Stock was canceled on February 4, 2013, in connection with our acquisition of CTI. No dividends had been declared
or paid on our Series A Convertible Preferred Stock.
EXHIBIT 21.1
Subsidiaries of Verint Systems Inc.
(as of March 1, 2015)
Name
Blue Pumpkin Software Israel Ltd.
Ciboodle Customer Interaction Solutions South Africa (PTY) Ltd
Ciboodle, Inc.
Ciboodle Ireland Ltd.
Ciboodle (Land and Estates) Ltd.
Ciboodle Ltd.
CIS Comverse Information Systems Ltd.
Edgar Acquisition Company Limited
Febrouin Investments Ltd.
Focal Info Israel Ltd.
Global Management Technologies, LLC
Global Management Technologies Asia-Pacific PTY Limited
Graham Technology BV
Iontas Limited
KANA Software BV
KANA Software Ireland Limited
KANA Software Ireland No. 2 Limited
KANA Software KK
KANA Software Limited
KANA Software PTY Ltd.
KANA Solutions Limited
Lagan Technologies Limited
MultiVision Holdings Limited
Permadeal Limited
Permarcard Limited
PT Ciboodle Indonesia
Rontal Engineering Applications (2001) Ltd.
Suntech S.A.
Sword Soft, Inc.
Syborg GmbH
Syborg Grundbesitz GmbH
Syborg Informationsysteme b.h. OHG
Trinicom Belgie NV
Trinicom Duetschland Gmbh
Trinicom UK Ltd
Triniventures BV
UTX Technologies Limited
Verint Acquisition LLC
Verint Americas Inc.
Verint Netherlands BV
Verint Systems (Asia Pacific) Limited
Verint Systems (Australia) PTY Ltd.
Verint Systems (India) Private Ltd.
Jurisdiction of
Incorporation or
Organization
Israel
South Africa
Delaware
Ireland
United Kingdom
United Kingdom
Israel
United Kingdom
Cyprus
Israel
Delaware
Australia
Netherlands
Ireland
Netherlands
Ireland
Ireland
Japan
United Kingdom
Australia
United Kingdom
United Kingdom
British Virgin Islands
Cyprus
Cyprus
Indonesia
Israel
Brazil
Delaware
Germany
Germany
Germany
Belgium
Germany
United Kingdom
Netherlands
Cyprus
Delaware
Delaware
Netherlands
Hong Kong
Australia
India
Name
Verint Systems (Singapore) Pte. Ltd. (1)
Verint Systems (Zhuhai) Limited
Verint Systems B.V.
Verint Systems Belgium N.V.
Verint Systems Bulgaria
Verint Systems Canada Inc.
Verint Systems Cayman Limited
Verint Systems GmbH
Verint Systems Holdings B.V.
Verint Systems Japan K.K.
Verint Systems Ltd.
Verint Systems New Zealand Limited
Verint Systems Poland sp.z.o.o.
Verint Systems SAS
Verint Systems UK Ltd.
Verint Technology Inc.
Verint Technology UK Limited
Verint Video Solutions Inc.
Verint Video Solutions SL
Verint Witness Systems UK Ltd.
Verint Witness Systems LLC
Verint Witness Systems S.A. de C.V.
Verint Witness Systems Services S.A. de C.V.
Verint Witness Systems Software, Hardware, E Servicos Do Brasil Ltda
Verint Systems (Taiwan) Ltd.
Verint WS Holdings Ltd.
View Links Euclipse Ltd.
Victory Acquisition I LLC
Vovici LLC
Witness Systems Software (India) Private Limited
Jurisdiction of
Incorporation or
Organization
Singapore
People's Republic of China
The Netherlands
Belgium
Bulgaria
Canada
Cayman Islands
Germany
The Netherlands
Japan
Israel
New Zealand
Poland
France
United Kingdom
Delaware
United Kingdom
Nevada
Spain
United Kingdom
Delaware
Mexico
Mexico
Brazil
Taiwan (Republic of China)
United Kingdom
Israel
Delaware
Delaware
India
___________________
(1) We own a 50% equity interest in this entity and do not have the power to unilaterally direct or cause the direction of
the management and policies of this entity.
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Verint Systems Inc.
Melville, New York
We consent to the incorporation by reference in Registration Statement Nos. 333-167618, 333-169005, 333-169768,
333-171006, 333-173421, 333-173454, 333-174820, 333-182032, 333-182755, 333-189062 and 333-198575 on Form S-8 and
Registration Statement No. 333-196612 on Form S-3 of our reports dated March 27, 2015, relating to the consolidated financial
statements of Verint Systems Inc., and the effectiveness of Verint Systems Inc.’s internal control over financial reporting,
appearing in this Annual Report on Form 10-K of Verint Systems Inc. for the year ended January 31, 2015.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 27, 2015
CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Dan Bodner, certify that:
1. I have reviewed this annual report on Form 10-K of Verint Systems Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: March 27, 2015
By:
/s/ Dan Bodner
Dan Bodner
President and Chief Executive Officer
Principal Executive Officer
CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Douglas E. Robinson, certify that:
1. I have reviewed this annual report on Form 10-K of Verint Systems Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: March 27, 2015
By:
/s/ Douglas E. Robinson
Douglas E. Robinson
Chief Financial Officer
Principal Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Verint Systems Inc. (the “Company”) on Form 10-K for the period ended January 31,
2015 (the “Report”), I, Dan Bodner, President and Chief Executive Officer of the Company, hereby certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: March 27, 2015
/s/ Dan Bodner
Dan Bodner
President and Chief Executive Officer
Principal Executive Officer
This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall
not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company
specifically incorporates it by reference.
EXHIBIT 32.2
CERTIFICATION REQUIRED BY 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Verint Systems Inc. (the “Company”) on Form 10-K for the period ended January 31,
2015 (the “Report”), I, Douglas E. Robinson, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: March 27, 2015
/s/ Douglas E. Robinson
Douglas E. Robinson
Chief Financial Officer
Principal Financial Officer
This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall
not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company
specifically incorporates it by reference.