UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended April 30, 2024
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to .
Commission File No. 001-34807
(Exact Name of Registrant as Specified in its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||||||||
| (Registrant’s Telephone Number, Including Area Code) | |||||||||||
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| (NASDAQ Global Select Market) | ||||||||||||||
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 every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☑ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
There were 61,776,686 shares of the registrant’s common stock outstanding on May 15, 2024.
| Verint Systems Inc. and Subsidiaries | ||||||||
| Index to Form 10-Q | ||||||||
| As of and For the Period Ended April 30, 2024 | ||||||||
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i
Cautionary Note on Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, the provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include, but are not limited to, 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, in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and are often identified by future or conditional words such as “will”, “plans”, “expects”, “intends”, “believes”, “seeks”, “estimates”, or “anticipates”, or by variations of such words or by similar expressions. There can be no assurance that forward-looking statements will be achieved. By their very nature, forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause our actual results or conditions to differ materially from those expressed or implied by such forward-looking statements. Important risks, uncertainties, assumptions, and other factors that could cause our actual results or conditions to differ materially from our forward-looking statements include, among others:
•uncertainties regarding the impact of changes in macroeconomic and/or global conditions, including as a result of slowdowns, recessions, economic instability, rising interest rates, tightening credit markets, inflation, instability in the banking sector, actual or threatened trade wars, political unrest, armed conflicts, natural disasters, or outbreaks of disease (including global epidemics or pandemics), as well as the resulting impact on spending by customers or partners, on our business;
•risks that our customers or partners delay, downsize, cancel, or refrain from placing orders or renewing subscriptions or contracts, or are unable to honor contractual commitments or payment obligations due to challenges or uncertainties in their budgets, liquidity, or businesses;
•risks associated with our ability to keep pace with technological advances and challenges and evolving industry standards, including achieving and maintaining the competitive differentiation of our solution platform; to adapt to changing market potential from area to area within our markets; and to successfully develop, launch, and drive demand for new, innovative, high-quality products and services that meet or exceed customer challenges and needs, while simultaneously preserving our legacy businesses and migrating away from areas of commoditization;
•risks due to aggressive competition in all of our markets and our ability to keep pace with competitors, some of whom may be able to grow faster than us or have greater resources than us, including in areas such as sales and marketing, branding, technological innovation and development, and recruiting and retention;
•risks associated with our ability to properly execute on our software as a service (“SaaS”) transition, including successfully transitioning customers to our cloud platform and the increased importance of subscription renewal rates, and risk of increased variability in our period-to-period results based on the mix, terms, and timing of our transactions;
•risks relating to our ability to properly identify and execute on growth or strategic initiatives, manage investments in our business and operations, and enhance our existing operations and infrastructure, including the proper prioritization and allocation of limited financial and other resources;
•risks associated with our ability to or costs to retain, recruit, and train qualified personnel and management in regions in which we operate either physically or remotely, including in new markets and growth areas we may enter, due to competition for talent, increased labor costs, applicable regulatory requirements, or otherwise;
•challenges associated with selling sophisticated solutions and cloud-based solutions, which may incorporate newer technologies, such as artificial intelligence (“AI”), whose adoption and use-cases are still emerging (and may present risks of their own), including with respect to longer sales cycles, more complex sales processes and customer evaluation and approval processes, more complex contractual and information security requirements, and assisting customers in understanding and realizing the benefits of our solutions and technologies, as well as with developing, offering, implementing, and maintaining an enterprise-class, broad solution portfolio;
•risks that we may be unable to maintain, expand, or enable our relationships with partners as part of our growth strategy, including partners with whom we may overlap or compete, while avoiding excessive concentration with one or more partners;
ii
•risks associated with our reliance on third-party suppliers, partners, or original equipment manufacturers (“OEMs”) for certain services, products, or components, including companies that may compete with us or work with our competitors;
•risks associated with our significant international operations, including exposure to regions subject to political or economic instability, fluctuations in foreign exchange rates, inflation, increased financial accounting and reporting burdens and complexities, and challenges associated with a significant portion of our cash being held overseas;
•risks associated with a significant part of our business coming from government contracts, and associated procurement processes and regulatory requirements;
•risks associated with our ability to identify suitable targets for acquisition or investment or successfully compete for, consummate, and implement mergers and acquisitions, including risks associated with valuations, legacy liabilities, reputational considerations, capital constraints, costs and expenses, maintaining profitability levels, expansion into new areas, management distraction, post-acquisition integration activities, and potential asset impairments;
•risks associated with complex and changing domestic and foreign regulatory environments, including, among others, with respect to data privacy, AI, cyber/information security, government contracts, anti-corruption, trade compliance, climate change or other environmental, social and governance matters, tax, and labor matters, relating to our own operations, the products and services we offer, and/or the use of our solutions by our customers;
•risks associated with the mishandling or perceived mishandling of sensitive or confidential information and data, including personally identifiable information or other information that may belong to our customers or other third parties, including in connection with our SaaS or other hosted or managed services offerings or when we are asked to perform service or support;
•risks associated with our reliance on third parties to provide certain cloud hosting or other cloud-based services to us or our customers, including the risk of service disruptions, data breaches, or data loss or corruption;
•risks that our solutions or services, or those of third-party suppliers, partners, or OEMs which we use in or with our offerings or otherwise rely on, including third-party hosting platforms, may contain defects, vulnerabilities, or develop operational problems;
•risk that we or our solutions may be subject to security vulnerabilities or lapses, including cyber-attacks, information technology system breaches, failures, or disruptions;
•risks that our intellectual property (“IP”) rights may not be adequate to protect our business or assets or that others may make claims on our IP, claim infringement on their IP rights, or claim a violation of their license rights, including relative to free or open source components we may use;
•risks associated with leverage resulting from our current debt position or our ability to incur additional debt, including with respect to liquidity considerations, covenant limitations and compliance, fluctuations in interest rates, dilution considerations (with respect to our convertible notes), and our ability to maintain our credit ratings;
•risks 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 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 the successor to CTI’s business operations, Mavenir Inc. (“Mavenir”), being unwilling or unable to provide us with certain indemnities to which we are entitled;
•risks associated with changing accounting principles or standards, tax laws and regulations, tax rates, and the continuing availability of expected tax benefits;
•risks relating to the adequacy of our existing infrastructure, systems, processes, policies, procedures, internal controls, and personnel, and our ability to successfully implement and maintain enhancements to the foregoing, for our current and future operations and reporting needs, including related risks of financial statement omissions, misstatements, restatements, or filing delays;
iii
•risks associated with market volatility in the prices of our common stock and convertible notes based on our performance, third-party publications or speculation, or other factors, and risks associated with actions of activist stockholders;
•risks associated with Apax Partners’ significant ownership position and potential that its interests will not be aligned with those of our common stockholders; and
•risks associated with the February 1, 2021 spin-off (the “Spin-Off”) of our former Cyber Intelligence Solutions business, including the possibility that the Spin-Off transaction does not achieve the benefits anticipated, does not qualify as a tax-free transaction, or exposes us to unexpected claims or liabilities.
These risks, uncertainties, assumptions, and challenges, as well as other factors, are discussed in greater detail in “Risk Factors” under Item 1A of our Annual Report on Form 10-K for the year ended January 31, 2024. 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.
iv
Part I
Item 1. Financial Statements
| VERINT SYSTEMS INC. AND SUBSIDIARIES | |||||
| Index to Condensed Consolidated Financial Statements (Unaudited) | |||||
| Page | |||||
1
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
| April 30, | January 31, | |||||||||||||
| (in thousands, except share and per share data) | 2024 | 2024 | ||||||||||||
| Assets | ||||||||||||||
| Current Assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Short-term investments | ||||||||||||||
Accounts receivable, net of allowance for credit losses of $ | ||||||||||||||
| Contract assets, net | ||||||||||||||
| Inventories | ||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property and equipment, net | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Goodwill | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Liabilities, Temporary Equity, and Stockholders' Equity | ||||||||||||||
| Current Liabilities: | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued expenses and other current liabilities | ||||||||||||||
| Contract liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt | ||||||||||||||
| Long-term contract liabilities | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Other liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and Contingencies | ||||||||||||||
| Temporary Equity: | ||||||||||||||
Preferred Stock — $ | ||||||||||||||
Series A Preferred Stock; | ||||||||||||||
Series B Preferred Stock; | ||||||||||||||
| Total temporary equity | ||||||||||||||
| Stockholders' Equity: | ||||||||||||||
Common stock — $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Retained earnings (accumulated deficit) | ( | |||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Total Verint Systems Inc. stockholders' equity | ||||||||||||||
| Noncontrolling interest | ||||||||||||||
| Total stockholders' equity | ||||||||||||||
| Total liabilities, temporary equity, and stockholders' equity | $ | $ | ||||||||||||
See notes to condensed consolidated financial statements.
2
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months Ended April 30, | ||||||||||||||
| (in thousands, except per share data) | 2024 | 2023 | ||||||||||||
| Revenue: | ||||||||||||||
| Recurring | $ | $ | ||||||||||||
| Nonrecurring | ||||||||||||||
| Total revenue | ||||||||||||||
| Cost of revenue: | ||||||||||||||
| Recurring | ||||||||||||||
| Nonrecurring | ||||||||||||||
| Amortization of acquired technology | ||||||||||||||
| 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 | ( | ( | ||||||||||||
| Other (expense) income, net | ( | |||||||||||||
| Total other expense, net | ( | ( | ||||||||||||
| Income before provision for income taxes | ||||||||||||||
| Provision for income taxes | ||||||||||||||
| Net income | ||||||||||||||
| Net income attributable to noncontrolling interests | ||||||||||||||
| Net income attributable to Verint Systems Inc. | ||||||||||||||
| Dividends on preferred stock | ( | ( | ||||||||||||
| Net income (loss) attributable to Verint Systems Inc. common shares | $ | $ | ( | |||||||||||
| Net income (loss) per common share attributable to Verint Systems Inc.: | ||||||||||||||
| Basic | $ | $ | ( | |||||||||||
| Diluted | $ | $ | ( | |||||||||||
| Weighted-average common shares outstanding: | ||||||||||||||
| Basic | ||||||||||||||
| Diluted | ||||||||||||||
See notes to condensed consolidated financial statements.
3
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
| Three Months Ended April 30, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| Net income | $ | $ | ||||||||||||
| Other comprehensive (loss) income, net of reclassification adjustments: | ||||||||||||||
| Foreign currency translation adjustments | ( | |||||||||||||
| Net decrease from foreign exchange contracts designated as hedges | ( | ( | ||||||||||||
| Benefit from income taxes on net decrease from foreign exchange contracts designated as hedges | ||||||||||||||
| Other comprehensive (loss) income | ( | |||||||||||||
| Comprehensive income | ||||||||||||||
| Comprehensive income attributable to noncontrolling interests | ||||||||||||||
| Comprehensive income attributable to Verint Systems Inc. | $ | $ | ||||||||||||
See notes to condensed consolidated financial statements.
4
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
| Verint Systems Inc. Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | (Accumulated Deficit) / Retained Earnings | Accumulated Other Comprehensive Loss | Total Verint Systems Inc. Stockholders’ Equity | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Shares | Par Value | Treasury Stock | Non-controlling Interests | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of January 31, 2024 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation — equity-classified awards | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for stock awards and stock bonuses | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchased and retired | ( | ( | ( | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to noncontrolling interest | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of April 30, 2024 | $ | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of January 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation — equity-classified awards | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for stock awards and stock bonuses | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchased and retired | ( | ( | ( | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to noncontrolling interest | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of April 30, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
See notes to condensed consolidated financial statements.
5
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Three Months Ended April 30, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Stock-based compensation, excluding cash-settled awards | ||||||||||||||
| Losses on early retirements of debt | ||||||||||||||
| Other, net | ||||||||||||||
| Changes in operating assets and liabilities, net of effects of business combinations and divestitures: | ||||||||||||||
| Accounts receivable | ||||||||||||||
| Contract assets | ( | |||||||||||||
| Inventories | ( | ( | ||||||||||||
| Prepaid expenses and other assets | ||||||||||||||
| Accounts payable and accrued expenses | ( | ( | ||||||||||||
| Contract liabilities | ( | ( | ||||||||||||
| Deferred income taxes | ||||||||||||||
| Other, net | ( | |||||||||||||
| Net cash provided by operating activities | ||||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Cash paid for asset acquisitions and business combinations, including adjustments, net of cash acquired | ( | |||||||||||||
| Divestitures, net of cash divested | ||||||||||||||
| Purchases of property and equipment | ( | ( | ||||||||||||
| Maturities and sales of investments | ||||||||||||||
| Purchases of investments | ( | ( | ||||||||||||
| Cash paid for capitalized software development costs | ( | ( | ||||||||||||
| Change in restricted bank time deposits, and other investing activities, net | ( | |||||||||||||
| Net cash used in investing activities | ( | ( | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Proceeds from borrowings | ||||||||||||||
| Repayments of borrowings and other financing obligations | ( | ( | ||||||||||||
| Purchases of treasury stock and common stock for retirement | ( | ( | ||||||||||||
| Preferred stock dividend payments | ( | ( | ||||||||||||
| Distributions paid to noncontrolling interest | ( | ( | ||||||||||||
| Payments of contingent consideration for business combinations (financing portion) | ( | ( | ||||||||||||
| Cash received for contingent consideration for business divestitures (financing portion) and other financing activities | ||||||||||||||
| Net cash used in financing activities | ( | ( | ||||||||||||
| Foreign currency effects on cash, cash equivalents, restricted cash, and restricted cash equivalents | ( | |||||||||||||
| Net decrease in cash, cash equivalents, restricted cash, and restricted cash equivalents | ( | ( | ||||||||||||
| Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period | ||||||||||||||
| Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period | $ | $ | ||||||||||||
| Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period to the condensed consolidated balance sheets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash and cash equivalents included in prepaid expenses and other current assets | ||||||||||||||
| Restricted cash and cash equivalents included in other assets | ||||||||||||||
| Total cash, cash equivalents, restricted cash, and restricted cash equivalents | $ | $ | ||||||||||||
See notes to condensed consolidated financial statements.
6
VERINT SYSTEMS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Unless the context otherwise requires, the terms “Verint”, “we”, “us”, and “our” in these notes to condensed consolidated financial statements refer to Verint Systems Inc. and its consolidated subsidiaries.
Verint is a leader in customer experience (“CX”) automation. The world’s most iconic brands – including more than 80 of the Fortune 100 companies – use the Verint Open Platform and our team of AI-powered bots to deliver tangible AI business outcomes across the enterprise.
Verint is uniquely positioned to help brands increase CX automation with our differentiated AI-powered Open Platform. Brands today are challenged to delight their customers while facing limited budgets and resources. As a result, organizations are turning to AI-powered platforms specifically designed for the customer engagement domain to increase the level of their CX automation rather than hire additional employees.
Verint is headquartered in Melville, New York, and has approximately 15 offices worldwide, in addition to a number of on-demand, flexible coworking spaces. We have approximately 3,700 employees plus a few hundred contractors around the globe focused on helping brands increase CX automation.
Apax Convertible Preferred Stock Investment
On December 4, 2019, we announced that an affiliate (the “Apax Investor”) of Apax Partners (“Apax”) would make an investment in us in an amount of up to $400.0 million. Under the terms of the Investment Agreement, dated as of December 4, 2019 (the “Investment Agreement”), on May 7, 2020, the Apax Investor purchased $200.0 million of our Series A convertible preferred stock (“Series A Preferred Stock”). On February 1, 2021, we completed the spin-off (the “Spin-Off”) of Cognyte Software Ltd. (“Cognyte”), a company limited by shares incorporated under the laws of the State of Israel whose business and operations consist of our former Cyber Intelligence Solutions business. In connection with the completion of the Spin-Off, on April 6, 2021, the Apax Investor purchased $200.0 million of our Series B convertible preferred stock (the “Series B Preferred Stock” and together with the Series A Preferred Stock, the “Preferred Stock”). As of April 30, 2024, Apax’s ownership in us on an as-converted basis was approximately 13.5 %. Please refer to Note 9, “Convertible Preferred Stock” for a more detailed discussion of the Apax investment.
Preparation of Condensed Consolidated Financial Statements
The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and on the same basis as the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2024 filed with the U.S. Securities and Exchange Commission (“SEC”). The condensed consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the periods ended April 30, 2024 and 2023, and the condensed consolidated balance sheet as of April 30, 2024, are not audited but reflect all adjustments that, in the opinion of management, are of a normal recurring nature and that are considered necessary for a fair presentation of the results for the periods shown. The condensed consolidated balance sheet as of January 31, 2024 is derived from the audited consolidated financial statements presented in our Annual Report on Form 10-K for the year ended January 31, 2024. Certain information and disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and disclosures required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended January 31, 2024 filed with the SEC. The results for interim periods are not necessarily indicative of a full year’s results.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Verint Systems Inc., and our wholly owned or otherwise controlled subsidiaries. Noncontrolling interests in less than wholly owned subsidiaries are reflected within stockholders’ equity on our condensed consolidated balance sheet, but separately from our stockholders’ equity.
7
Equity investments in companies in which we have less than a 20% ownership interest and cannot exercise significant influence, and which do not have readily determinable fair values, are accounted for at cost, adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer, less any impairment.
We include the results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Key estimates in the accompanying condensed consolidated financial statements include, among others, revenue recognition, allowances for doubtful accounts, determining the fair value of assets and liabilities assumed in business combinations, recoverability of goodwill, amortization of intangibles, evaluation of contingencies, and the accounting for income taxes. Actual results could differ from those estimates.
Significant Accounting Policies
There have been no material changes in our significant accounting policies during the three months ended April 30, 2024, as compared to the significant accounting policies described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2024.
Recently Adopted Accounting Pronouncements
There have been no recently adopted accounting pronouncements since the filing of our Annual Report on Form 10-K for the year ended January 31, 2024 that may have a material impact on our condensed consolidated financial statements.
New Accounting Pronouncements Not Yet Effective
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which will require public companies to report incremental segment information on an annual and interim basis, including enhanced disclosures of significant segment expenses included within each reported measure of segment profit or loss. ASU No. 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted, and the amendments should be applied retrospectively. We plan to adopt ASU No. 2023-07 effective for the annual report on Form 10-K for the year ending January 31, 2025 and subsequent interim periods, and are currently evaluating the impact of this standard on our condensed consolidated financial statement disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which will require greater disaggregation of a reporting entity’s effective tax rate reconciliation as well as income taxes paid. ASU No. 2023-09 is effective for annual periods beginning after December 15, 2024 on a prospective basis, with early adoption permitted. We are currently evaluating the impact of this standard on our condensed consolidated financial statement disclosures.
2. REVENUE RECOGNITION
We derive our revenue primarily from providing customers the right to access our cloud-based solutions, the right to use our software for an indefinite or specified period of time, and related services and support based on when access or control of the software passes to our customers or the services are provided, in an amount that reflects the consideration we expect to be entitled to in exchange for such goods or services. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transactions, including mandatory government charges that are passed through to our customers.
We determine revenue recognition through the following five steps:
•Identification of the contract, or contracts, with a customer
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•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, performance obligations are satisfied
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable.
Disaggregation of Revenue
The following table provides a disaggregation of our recurring and nonrecurring revenue. Recurring revenue is the portion of our revenue that we believe is likely to be renewed in the future. The recurrence of these revenue streams in future periods depends on a number of factors including contractual periods and customers' renewal decisions.
•Recurring revenue primarily consists of:
◦Software as a service (“SaaS”) revenue, which consists predominately of bundled SaaS (software access rights with standard managed services) and unbundled SaaS (software licensing rights accounted for as term-based licenses whereby customers have a license to our software with related support for a specific period).
▪Bundled SaaS revenue is recognized over time.
▪Unbundled SaaS revenue is recognized at a point in time, except for the related support which is recognized over time. Unbundled SaaS contracts are eligible for renewal after the initial fixed term, which in most cases is between a - and three-year time frame. Unbundled SaaS can be deployed in the cloud, either by us or a cloud partner.
◦Optional managed services revenue.
◦Support revenue, which consists of initial and renewal support on our perpetual licenses.
•Nonrecurring revenue primarily consists of our perpetual licenses, hardware, installation services, business advisory consulting and training services, and patent license royalties.
| Three Months Ended April 30, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| Recurring revenue: | ||||||||||||||
| Bundled SaaS revenue | $ | $ | ||||||||||||
| Unbundled SaaS revenue | ||||||||||||||
| Total SaaS revenue | ||||||||||||||
| Optional managed services revenue | ||||||||||||||
| Support revenue | ||||||||||||||
| Total recurring revenue | ||||||||||||||
| Nonrecurring revenue: | ||||||||||||||
| Perpetual revenue | ||||||||||||||
| Professional services and other revenue | ||||||||||||||
| Total nonrecurring revenue | ||||||||||||||
| Total revenue | $ | $ | ||||||||||||
Contract Balances
The following table provides information about accounts receivable, contract assets, and contract liabilities from contracts with customers:
| (in thousands) | April 30, 2024 | January 31, 2024 | ||||||||||||
| Accounts receivable, net | $ | $ | ||||||||||||
| Contract assets, net | $ | $ | ||||||||||||
| Long-term contract assets, net (included in other assets) | $ | $ | ||||||||||||
| Contract liabilities | $ | $ | ||||||||||||
| Long-term contract liabilities | $ | $ | ||||||||||||
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We receive payments from customers based upon contractual billing schedules, and accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets are rights to consideration in exchange for goods or services that we have transferred to a customer when that right is conditional on something other than the passage of time. The majority of our contract assets represent unbilled amounts related to multi-year unbundled SaaS contracts and arrangements where our right to consideration is subject to the contractually agreed upon billing schedule. We expect billing and collection of a majority of our contract assets to occur within the next twelve months and asset impairment charges related to contract assets were immaterial in the three months ended April 30, 2024 and 2023. As of April 30, 2024, two partners, both authorized global resellers of our solutions, accounted for more than 10% of our aggregated accounts receivable and contract assets; Partner A was approximately 13 14 14
Contract liabilities represent consideration received or consideration which is unconditionally due from customers prior to transferring goods or services to the customer under the terms of the contract. Revenue recognized during the three months ended April 30, 2024 and 2023 from amounts included in contract liabilities at the beginning of each period was $99.1 million and $101.5 million, respectively.
Remaining Performance Obligations
Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes contract liabilities and non-cancelable amounts that will be invoiced and recognized as revenue in future periods. The majority of our arrangements are for periods of to three years , although the contract term can extend up to five years .
We elected to exclude amounts of variable consideration attributable to sales- or usage-based royalties in exchange for a license of our IP from the remaining performance obligations. The timing and amount of revenue recognition for our remaining performance obligations are influenced by several factors, including seasonality, the timing of renewals, the timing of delivery of software licenses, the average length of the contract terms, and foreign currency exchange rates.
The following table provides information about when we expect to recognize our remaining performance obligations:
| (in thousands) | April 30, 2024 | January 31, 2024 | ||||||||||||
Remaining performance obligations: | ||||||||||||||
| Expected to be recognized within 1 year | $ | $ | ||||||||||||
| Expected to be recognized in more than 1 year | ||||||||||||||
Total remaining performance obligations | $ | $ | ||||||||||||
3. NET INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC.
The following table summarizes the calculation of basic and diluted net income (loss) per common share attributable to Verint Systems Inc. for the three months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | ||||||||||||||
| (in thousands, except per share amounts) | 2024 | 2023 | ||||||||||||
| Net income | $ | $ | ||||||||||||
| Net income attributable to noncontrolling interests | ||||||||||||||
| Net income attributable to Verint Systems Inc. | ||||||||||||||
| Dividends on preferred stock | ( | ( | ||||||||||||
| Net income (loss) attributable to Verint Systems Inc. for basic net loss per common share | ( | |||||||||||||
| Dilutive effect of dividends on preferred stock | ||||||||||||||
| Net income (loss) attributable to Verint Systems Inc. for diluted net income (loss) per common share | $ | $ | ( | |||||||||||
| Weighted-average shares outstanding: | ||||||||||||||
| Basic | ||||||||||||||
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| Three Months Ended April 30, | ||||||||||||||
| (in thousands, except per share amounts) | 2024 | 2023 | ||||||||||||
| Dilutive effect of employee equity award plans | ||||||||||||||
| Dilutive effect of 2021 Notes | ||||||||||||||
| Dilutive effect of assumed conversion of preferred stock | ||||||||||||||
| Diluted | ||||||||||||||
| Net income (loss) per common share attributable to Verint Systems Inc.: | ||||||||||||||
| Basic | $ | $ | ( | |||||||||||
| Diluted | $ | $ | ( | |||||||||||
We excluded the following weighted-average potential common shares from the calculations of diluted net income (loss) per common share during the applicable periods because their inclusion would have been anti-dilutive:
| Three Months Ended April 30, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| Common shares excluded from calculation: | ||||||||||||||
| Restricted and performance stock-based awards | ||||||||||||||
| Series A Preferred Stock | ||||||||||||||
| Series B Preferred Stock | ||||||||||||||
In periods for which we report a net loss attributable to Verint Systems Inc. common shares, basic net loss per common share and diluted net loss per common share are identical since the effect of all potential common shares is anti-dilutive and therefore excluded.
For the three months ended April 30, 2024, the average price of our common stock did not exceed the $62.08 per share conversion price of our 2021 Notes, and other requirements for the 2021 Notes (as defined in Note 7, “Long-Term Debt”), to be convertible were not met. The 2021 Notes will have a dilutive impact on net income per common share at any time when the average market price of our common stock for a quarterly reporting period exceeds the conversion price.
The Capped Calls (as defined in Note 7, “Long-Term Debt”) do not impact our diluted earnings per common share calculations as their effect would be anti-dilutive. The Capped Calls are generally intended to reduce the potential dilution to our common stock upon any conversion of the 2021 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2021 Notes, in the event that at the time of conversion our common stock price exceeds the $62.08 conversion price, with such reduction and/or offset subject to a cap of $100.00 .
Further details regarding the 2021 Notes and Capped Calls appear in Note 7, “Long-Term Debt”.
The weighted-average common shares underlying the assumed conversion of the Preferred Stock, on an as-converted basis, were excluded from the calculations of diluted net income (loss) per common share for the three months ended April 30, 2024 and 2023, as their effect would have been anti-dilutive. Further details regarding the Preferred Stock investment appear in Note 9, “Convertible Preferred Stock”.
4. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The following tables summarize our cash, cash equivalents, and short-term investments as of April 30, 2024 and January 31, 2024:
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| April 30, 2024 | ||||||||||||||||||||||||||
| (in thousands) | Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||||||||||
| Cash and bank time deposits | $ | $ | — | $ | — | $ | ||||||||||||||||||||
| Money market funds | — | — | ||||||||||||||||||||||||
| U.S. Treasury bills | — | — | ||||||||||||||||||||||||
| Total cash and cash equivalents | $ | $ | — | $ | — | $ | ||||||||||||||||||||
| Short-term investments: | ||||||||||||||||||||||||||
| Bank time deposits | $ | $ | $ | $ | ||||||||||||||||||||||
| Total short-term investments | $ | $ | $ | $ | ||||||||||||||||||||||
| January 31, 2024 | ||||||||||||||||||||||||||
| (in thousands) | Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||||||||||
| Cash and bank time deposits | $ | $ | — | $ | — | $ | ||||||||||||||||||||
| Money market funds | — | — | ||||||||||||||||||||||||
U.S. Treasury Bills | — | — | ||||||||||||||||||||||||
| Total cash and cash equivalents | $ | $ | — | $ | — | $ | ||||||||||||||||||||
| Short-term investments: | ||||||||||||||||||||||||||
| Bank time deposits | $ | $ | $ | $ | ||||||||||||||||||||||
| Total short-term investments | $ | $ | $ | $ | ||||||||||||||||||||||
Bank time deposits which are reported within short-term investments consist of deposits held outside of the United States 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.
5. BUSINESS COMBINATIONS, ASSET ACQUISITIONS, AND DIVESTITURES
Three Months Ended April 30, 2024
During the three months ended April 30, 2024, we completed the acquisition of an AI-powered analytics company, including fourteen employees. Pursuant to the terms of the purchase agreement, the purchase price consisted of $8.8 million of cash paid at closing, contingent consideration with an estimated fair value of $3.4 million, and the acquisition date fair value of our previously held investment via a simple agreement for future equity (“SAFE”), which was approximately $1.7 million. Further discussion regarding this SAFE investment appears in Note 12, “Fair Value Measurements”. We recognized intangible assets of $5.2 million for developed technology, $0.2 million for the acquired customer relationships, and goodwill of $8.3 million. The acquisition qualified as a stock transaction for tax purposes. This transaction was not material to our condensed consolidated financial statements, and as a result, additional business combination disclosures for this acquisition have been omitted.
Year Ended January 31, 2024
During the year ended January 31, 2024, we completed the acquisition of a provider of solutions for workforce scheduling automation, including three employees. This transaction resulted in increases to goodwill, customer relationships, and acquired technology intangible assets, but was not material to our condensed consolidated financial statements, and as a result, additional business combination disclosures for this acquisition have been omitted.
Revenue and net income (loss) attributable to this acquisition for the three months ended April 30, 2024 was not material.
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Other Business Combination Information
For the three months ended April 30, 2024 and 2023, we recorded a benefit of $0.4 million and a charge of $0.2 million, respectively, within for changes in the fair values of contingent consideration obligations associated with business combinations, which was based on our historical business combinations achieving certain objectives and milestones. The aggregate fair values of the remaining contingent consideration obligations associated with business combinations was $6.9 million at April 30, 2024, of which $2.1 million was recorded within accrued expenses and other current liabilities, and $4.8 million was recorded within other liabilities.
Payments of contingent consideration earned under these agreements were $3.3 million and $0.3 million for the three months ended April 30, 2024 and 2023, respectively.
Asset Acquisition
In July 2023, we entered into an agreement to acquire source code that qualified as an asset acquisition and made an initial deposit payment of $1.0 million upon the execution of the contract and incurred direct transaction costs related to such asset acquisition of $0.2 million. The agreement also stipulates the establishment of additional milestone payments totaling $3.0 million, of which $2.0 million was deposited into a third-party escrow account in connection with the closing of the transaction. These milestone payments are contingent upon the successful delivery of the source code and the attainment of specific developmental objectives subject to reduction by certain amounts paid under a separate transition services agreement entered into by the parties. During the year ended January 31, 2024, we made $1.8 million in milestone payments to the seller, of which $0.8 million was released from the escrow account upon the achievement of certain source code delivery and integration milestones. During the three months ended April 30, 2024, we made an additional $0.2 million integration milestone payment to the seller, which was released from the escrow account. The remaining $1.0 million of milestone payments remains in the third-party escrow account, is classified as restricted cash, and is included in prepaid expenses and other current assets on our condensed consolidated balance sheet as of April 30, 2024.
The transaction also provides for additional consideration that is contingent upon achieving certain performance targets for the years ending January 31, 2025 and 2026 of up to $5.0 million, with a minimum of $2.0 million guaranteed over the period, contingent upon achieving the milestones outlined above by the agreed upon dates, plus the opportunity to receive additional payments from us based on any revenue we receive from sales of products based on the acquired technology in adjacent markets. During the three months ended April 30, 2024, we made a $0.3 million noncontingent prepayment against the first period earn-out. Contingent consideration is not recorded in an asset acquisition until the contingency is resolved (when the contingent consideration is paid or becomes payable) or when probable and reasonably estimable.
Divestitures
On January 31, 2024, we completed the sale of a services business for manual quality managed services. We sold the business to the former managers, who were our employees. Today, our platform includes an AI-powered solution for automating the quality monitoring process. We expect our customers to adopt AI over time and believe that a people centric managed services offering is no longer core to our offering.
We estimated the sale price under the sale agreement to be $6.0 million based on (i) the estimated fair value of our share of the future adjusted operating income (as defined in the sale agreement) of the business, to be paid annually over a minimum of six years following the transaction closing date, (ii) the amount by which the closing working capital of the business exceeds the working capital target, and (iii) the estimated amount of future collections of outstanding receivables as of the closing date from a certain customer, net of certain expenses. We determined the estimated fair value of the contingent consideration with the assistance of a third-party valuation specialist and estimates made by management. During the three months ended January 31, 2024, we recognized a pre-tax loss on the sale of $9.7 million, which was recorded as part of selling, general, and administrative expenses in our consolidated statement of operations, and included $0.8 million of cumulative foreign translation loss that was released from accumulated other comprehensive loss and divestiture-related expenses were not material. As part of the transaction, we divested $6.5 million of cash, most of which was intended as reimbursement for certain liabilities assumed by the buyer, as well as $1.0 million of tangible net assets, $0.5 million of intangible assets, and $6.8 million of goodwill. The divested services business generated $6.8 million of revenue during the three months ended April 30, 2023, and several hundred employees dedicated to this managed services business were transferred or terminated as part of the transaction. During the three months ended April 30, 2024, we received $1.5 million of the outstanding receivables as of the closing date.
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In March 2023, we completed the sale of an insignificant product line that we inherited as part of a legacy acquisition and that no longer fit with our current business priorities or strategic direction. The total consideration for the sale was $0.7 million, which is payable to us in three equal installments through March 2025, the first installment of which was received in July 2023, and the second installment of which was received in February 2024. The transaction reduced goodwill by $0.3 million and intangible assets by $0.2 million and resulted in a gain of approximately $0.2 million during the three months ended April 30, 2023.
6. INTANGIBLE ASSETS AND GOODWILL
Acquisition-related intangible assets, excluding certain intangible assets previously acquired that were fully amortized and intangible assets of the businesses we divested which were removed from our condensed consolidated balance sheets, consisted of the following as of April 30, 2024 and January 31, 2024:
| April 30, 2024 | ||||||||||||||||||||
| (in thousands) | Cost | Accumulated Amortization | Net | |||||||||||||||||
| Intangible assets with finite lives: | ||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | ||||||||||||||||
| Acquired technology | ( | |||||||||||||||||||
| Trade names | ( | |||||||||||||||||||
| Distribution network | ( | |||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | ||||||||||||||||
| January 31, 2024 | ||||||||||||||||||||
| (in thousands) | Cost | Accumulated Amortization | Net | |||||||||||||||||
| Intangible assets with finite lives: | ||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | ||||||||||||||||
| Acquired technology | ( | |||||||||||||||||||
| Trade names | ( | |||||||||||||||||||
| Distribution network | ( | |||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | ||||||||||||||||
Total amortization expense recorded for acquisition-related intangible assets was $4.4 million and $8.3 million for the three months ended April 30, 2024 and 2023, respectively. The reported amount of net acquisition-related intangible assets can fluctuate from the impact of changes in foreign currency exchange rates on intangible assets not denominated in U.S. dollars.
Estimated future amortization expense on finite-lived acquisition-related intangible assets is as follows:
| (in thousands) | ||||||||
| Years Ending January 31, | Amount | |||||||
| 2025 (remainder of year) | $ | |||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 | ||||||||
| 2030 and thereafter | ||||||||
| Total | $ | |||||||
There were no
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Goodwill activity for the three months ended April 30, 2024 was as follows:
| (in thousands) | Amount | |||||||
| Three Months Ended April 30, 2024: | ||||||||
| Goodwill, gross, at January 31, 2024 | $ | |||||||
| Accumulated impairment losses through January 31, 2024 | ( | |||||||
| Goodwill, net, at January 31, 2024 | ||||||||
| Foreign currency translation and other | ( | |||||||
| Business combinations | ||||||||
| Goodwill, net, at April 30, 2024 | $ | |||||||
| Balance at April 30, 2024 | ||||||||
| Goodwill, gross, at April 30, 2024 | $ | |||||||
| Accumulated impairment losses through April 30, 2024 | ( | |||||||
| Goodwill, net, at April 30, 2024 | $ | |||||||
No events or circumstances indicating the potential for goodwill impairment were identified during the three months ended April 30, 2024.
7. LONG-TERM DEBT
The following table summarizes our long-term debt at April 30, 2024 and January 31, 2024:
| April 30, | January 31, | |||||||||||||
| (in thousands) | 2024 | 2024 | ||||||||||||
| 2021 Notes | $ | $ | ||||||||||||
| Revolving Credit Facility | ||||||||||||||
| Less: unamortized debt discounts and issuance costs | ( | ( | ||||||||||||
| Total debt | ||||||||||||||
| Less: current maturities | ||||||||||||||
| Long-term debt | $ | $ | ||||||||||||
2021 Notes
On April 9, 2021, we issued $315.0 million in aggregate principal amount of 0.25 % convertible senior notes due April 15, 2026 (the “2021 Notes”), unless earlier converted by the holders pursuant to their terms. The 2021 Notes are unsecured and pay interest in cash semiannually in arrears at a rate of 0.25 % per annum.
We used a portion of the net proceeds from the issuance of the 2021 Notes to pay the costs of the Capped Calls described below. We also used a portion of the net proceeds from the issuance of the 2021 Notes, together with the net proceeds from the April 6, 2021 issuance of $200.0 million of Series B Preferred Stock, to repay a portion of the outstanding indebtedness under our Credit Agreement described below, to terminate an interest rate swap, and to repurchase shares of our common stock. The remainder is being used for working capital and other general corporate purposes.
The 2021 Notes are convertible into shares of our common stock at an initial conversion rate of 16.1092 shares per $1,000 principal amount of 2021 Notes, which represents an initial conversion price of approximately $62.08 per share, subject to adjustment upon the occurrence of certain events, and subject to customary anti-dilution adjustments. Prior to January 15, 2026, the 2021 Notes will be convertible only upon the occurrence of certain events and during certain periods, and will be convertible thereafter at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2021 Notes. Upon conversion of the 2021 Notes, holders will receive cash up to the aggregate principal amount, with any remainder to be settled with cash or common stock, or a combination thereof, at our election. As of April 30, 2024, the 2021 Notes were not convertible.
We incurred approximately $8.9 million of issuance costs in connection with the 2021 Notes, which were deferred and are presented as a reduction of long-term debt, and which are being amortized as interest expense over the term of the 2021 Notes.
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Including the impact of the deferred debt issuance costs, the effective interest rate on the 2021 Notes was approximately 0.83 % at April 30, 2024.
Based on the closing market price of our common stock on April 30, 2024, the if-converted value of the 2021 Notes was less than their aggregate principal amount.
Capped Calls
In connection with the issuance of the 2021 Notes, on April 6, 2021 and April 8, 2021, we entered into capped call transactions (the “Capped Calls”) with certain counterparties. The Capped Calls are generally intended to reduce the potential dilution to our common stock upon any conversion of the 2021 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2021 Notes, in the event that at the time of conversion our common stock price exceeds the conversion price, with such reduction and/or offset subject to a cap.
The Capped Calls exercise price is equal to the $62.08 initial conversion price of each of the 2021 Notes, and the cap price is $100.00 , each subject to certain adjustments under the terms of the Capped Calls. Our exercise rights under the Capped Calls generally trigger upon conversion of the 2021 Notes, and the Capped Calls terminate upon maturity of the 2021 Notes, or the first day the 2021 Notes are no longer outstanding. As of April 30, 2024, no Capped Calls have been exercised.
Pursuant to their terms, the Capped Calls qualify for classification within stockholders’ equity, and their fair value is not remeasured and adjusted as long as they continue to qualify for stockholders’ equity classification. We paid approximately $41.1 million for the Capped Calls, including applicable transaction costs, which was recorded as a reduction to additional paid-in capital.
Credit Agreement
On June 29, 2017, we entered into a credit agreement with certain lenders and terminated a prior credit agreement. The credit agreement was amended in 2018, 2020, 2021, and 2023, as further described below (as amended, the “Credit Agreement”).
The Credit Agreement provides for $725.0 million of senior secured credit facilities, comprised of a $425.0 million term loan that was scheduled to mature on June 29, 2024 (the “Term Loan”) prior to being repaid by us in full, and a $300.0 million revolving credit facility maturing on April 9, 2026 (the “Revolving Credit Facility”). The Revolving Credit Facility replaced our prior $300.0 million revolving credit facility (the “Prior Revolving Credit Facility”) and is subject to increase and reduction from time to time according to the terms of the Credit Agreement. The majority of the proceeds from the Term Loan were used to repay all outstanding term loans under our prior credit agreement.
Optional prepayments of loans under the Credit Agreement are generally permitted without premium or penalty. During the three months ended April 30, 2021, in addition to our regular quarterly $1.1 million principal payment, we repaid $309.0 million of our Term Loan, reducing the outstanding principal balance to $100.0 million. On April 27, 2023, we repaid the remaining $100.0 million outstanding principal balance on our Term Loan utilizing proceeds from borrowings under our Revolving Credit Facility, along with $0.5 million of accrued interest thereon. As a result, $0.2 million of combined deferred debt issuance costs and unamortized discount associated with the Term Loan were written off and were included within interest expense on our condensed consolidated statement of operations for the three months ended April 30, 2023.
Interest rates on loans under the Credit Agreement are periodically reset, at our option, originally at either a Eurodollar Rate (which was derived from LIBOR) or an alternative base rate (“ABR”) (each as defined in the Credit Agreement), plus in each case a margin.
On May 10, 2023, we entered into an amendment to the Credit Agreement (the “Fourth Amendment”) related to the phase-out of LIBOR by the UK Financial Conduct Authority. Effective July 1, 2023, borrowings under the Credit Agreement bear interest, at our option, at either: (i) the ABR, plus the applicable margin therefor or (ii) the adjusted Term Secured Overnight Financing Rate published by the CME Term SOFR Administrator (as more fully defined and set forth in the Credit Agreement, “Adjusted Term SOFR”), plus the applicable margin therefor. The applicable margin in each case is determined based on our Leverage Ratio (as defined below) and ranges from 0.25 % to 1.25 % for borrowings bearing interest at the ABR and from 1.25 % to 2.25 % for borrowings bearing interest based on Adjusted Term SOFR.
Borrowings outstanding under the Revolving Credit Facility were $100.0
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the Credit Agreement) leverage ratio (the "Leverage Ratio"). As of April 30, 2024, the interest rate on our Revolving Credit Facility borrowings was 6.93 %. In addition, we are required to pay a commitment fee with respect to unused availability under the Revolving Credit Facility at rates per annum determined by reference to our Leverage Ratio. The proceeds of borrowings under the Revolving Credit Facility may be used for working capital and general corporate purposes, including for permitted acquisitions and permitted stock repurchases, and the repayment of term loans, if any.
Our obligations under the Credit Agreement are guaranteed by each of our direct and indirect existing and future material domestic wholly owned restricted subsidiaries, and are secured by a security interest in substantially all of our assets and the assets of the guarantor subsidiaries, subject to certain exceptions.
The Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this type. The Credit Agreement also contains a financial covenant that, solely with respect to the Revolving Credit Facility, requires us to maintain a Leverage Ratio of no greater than 4.50 to 1. The limitations imposed by the covenants are subject to certain exceptions as detailed in the Credit Agreement.
The Credit Agreement provides for events of default with corresponding grace periods that we believe are customary for credit facilities of this type. Upon an event of default, all of our obligations owed under the Credit Agreement may be declared immediately due and payable, and the lenders’ commitments to make loans under the Credit Agreement may be terminated.
Deferred debt issuance costs associated with the Term Loan were amortized using the effective interest rate method, and deferred debt issuance costs associated with the Revolving Credit Facility are being amortized on a straight-line basis.
Interest Expense
The following table presents the components of interest expense incurred on the 2021 Notes and on borrowings under our Credit Agreement, for the three months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| 2021 Notes: | ||||||||||||||
Interest expense at | $ | $ | ||||||||||||
| Amortization of deferred debt issuance costs | ||||||||||||||
| Total Interest Expense — 2021 Notes | $ | $ | ||||||||||||
| Borrowings under Credit Agreement: | ||||||||||||||
| Interest expense at contractual rates | $ | $ | ||||||||||||
| Amortization of deferred debt issuance costs | ||||||||||||||
| Amortization of debt discounts | ||||||||||||||
| Losses on early retirements of debt | ||||||||||||||
| Total Interest Expense — Borrowings under Credit Agreement | $ | $ | ||||||||||||
8. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION
Condensed Consolidated Balance Sheets
Inventories consisted of the following as of April 30, 2024 and January 31, 2024:
| April 30, | January 31, | |||||||||||||
| (in thousands) | 2024 | 2024 | ||||||||||||
| Raw materials | $ | $ | ||||||||||||
| Work-in-process | ||||||||||||||
| Finished goods | ||||||||||||||
| Total inventories | $ | $ | ||||||||||||
Accrued expenses and other current liabilities consisted of the following as of April 30, 2024 and January 31, 2024:
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| April 30, | January 31, | |||||||||||||
| (in thousands) | 2024 | 2024 | ||||||||||||
| Accrued bonus | $ | $ | ||||||||||||
| Other | ||||||||||||||
| Total accrued expenses and other current liabilities | $ | $ | ||||||||||||
Other liabilities consisted of the following as of April 30, 2024 and January 31, 2024:
| April 30, | January 31, | |||||||||||||
| (in thousands) | 2024 | 2024 | ||||||||||||
| Unrecognized tax benefits, including interest and penalties | $ | $ | ||||||||||||
| Other | ||||||||||||||
| Total other liabilities | $ | $ | ||||||||||||
Condensed Consolidated Statements of Operations
Other (expense) income, net consisted of the following for the three months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| Foreign currency (losses) gains, net | $ | ( | $ | |||||||||||
| Other, net | ( | |||||||||||||
| Total other (expense) income, net | $ | ( | $ | |||||||||||
Condensed Consolidated Statements of Cash Flows
The following table provides supplemental information regarding our condensed consolidated cash flows for the three months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| Cash paid for interest | $ | $ | ||||||||||||
| Cash payments of income taxes, net | $ | $ | ||||||||||||
| Cash payments for operating leases | $ | $ | ||||||||||||
| Non-cash investing and financing transactions: | ||||||||||||||
| Finance leases of property and equipment | $ | $ | ||||||||||||
| Accrued but unpaid purchases of property and equipment | $ | $ | ||||||||||||
| Liabilities for contingent consideration in business combinations | $ | $ | ||||||||||||
| Accrued but unpaid purchases of treasury stock | $ | $ | ||||||||||||
| Excise tax on share repurchases | $ | $ | ||||||||||||
9. CONVERTIBLE PREFERRED STOCK
On December 4, 2019, we entered into the Investment Agreement with the Apax Investor whereby, subject to certain closing conditions, the Apax Investor agreed to make an investment in us in an amount up to $400.0 million as follows:
•On May 7, 2020, we issued a total of 200,000 shares of our Series A Preferred Stock for an aggregate purchase price of $200.0 million, or $1,000 per share, to the Apax Investor. In connection therewith, we incurred direct and incremental costs of $2.7 million, including financial advisory fees, closing costs, legal fees, and other offering-related costs. These direct and incremental costs reduced the carrying amount of the Series A Preferred Stock.
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•In connection with the completion of the Spin-Off, on April 6, 2021, we issued a total of 200,000 shares of our Series B Preferred Stock for an aggregate purchase price of $200.0 million, or $1,000 per share, to the Apax Investor. In connection therewith, we incurred direct and incremental costs of $1.3 million, including financial advisory fees, closing costs, legal fees, and other offering-related costs. These direct and incremental costs reduced the carrying amount of the Series B Preferred Stock.
Each of the rights, preferences, and privileges of the Series A Preferred Stock and Series B Preferred Stock are set forth in separate certificates of designation filed with the Secretary of State of the State of Delaware on the applicable issuance date.
Voting Rights
Holders of the Preferred Stock have the right to vote on matters submitted to a vote of the holders of our common stock, on an as-converted basis; however, in no event will the holders of Preferred Stock have the right to vote shares of the Preferred Stock on an as-converted basis in excess of 19.9 % of the voting power of the common stock outstanding immediately prior to December 4, 2019.
Dividends and Liquidation Rights
The Preferred Stock ranks senior to the shares of our common stock with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of our affairs. Shares of Preferred Stock have a liquidation preference of the greater of $1,000 per share or the amount that would be received if the shares are converted at the then applicable conversion price at the time of such liquidation.
Each series of Preferred Stock paid dividends at an annual rate of 5.2 % until May 7, 2024, and thereafter pays at a rate of 4.0 %, subject to adjustment under certain circumstances. Dividends on the Preferred Stock are cumulative and payable semi-annually in arrears in cash. All dividends that are not paid in cash will remain accumulated dividends with respect to each share of Preferred Stock. The dividend rate is subject to increase (i) to 6.0 % per annum in the event the number of shares of common stock into which the Preferred Stock could be converted exceeds 19.9 % of the voting power of outstanding common stock on December 4, 2019 (unless we obtain shareholder approval of the issuance of common stock upon conversion of the Preferred Stock) and (ii) by 1.0 % each year, up to a maximum dividend rate of 10.0 % per annum, in the event we fail to satisfy our obligations to redeem the Preferred Stock in specified circumstances.
For the three months ended April 30, 2024, we paid $10.4 million of preferred stock dividends, all of which was accrued as of January 31, 2024, and there were $6.9 million of cumulative undeclared and unpaid preferred stock dividends at April 30, 2024. There were no accrued dividends as of April 30, 2024. We reflected $5.2
Conversion
The Series A Preferred Stock was initially convertible into common stock at the election of the holder, subject to certain conditions, at an initial conversion price of $53.50 per share. The initial conversion price represented a conversion premium of 17.1 % over the volume-weighted average price per share of our common stock over the 45 consecutive trading days immediately prior to December 4, 2019. In accordance with the Investment Agreement, the Series A Preferred Stock did not participate in the Spin-Off distribution of the Cognyte shares, which occurred on February 1, 2021, and the Series A Preferred Stock conversion price was instead adjusted to $36.38 per share based on the ratio of the relative trading prices of Verint and Cognyte following the Spin-Off.
The Series B Preferred Stock is convertible at a conversion price of $50.25 , based in part on our trading price over the 20 -day trading period following the Spin-Off.
As of April 30, 2024, the maximum number of shares of common stock that could be required to be issued upon conversion of the outstanding shares of Preferred Stock was approximately 9.6 million shares and Apax’s ownership in us on an as-converted basis was approximately 13.5 %.
Beginning May 7, 2023, in the case of the Series A Preferred Stock, and April 6, 2024, in the case of the Series B Preferred Stock, we have the option to require that all (but not less than all) of the then-outstanding shares of Preferred Stock of the series convert into common stock if the volume-weighted average price per share of the common stock for at least 30 trading days in any 45 consecutive trading day period exceeds 175 % of the then-applicable conversion price of such series (a “Mandatory
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Conversion”). As of April 30, 2024, the volume-weighted average price per share of common stock has not exceeded 175 % of the $36.38 conversion price of the Series A Preferred Stock or the $50.25 conversion price of the Series B Preferred Stock.
We may redeem any or all of the Preferred Stock of a series for cash at any time after May 7, 2026, in the case of the Series A Preferred Stock, and April 6, 2027, in the case of the Series B Preferred Stock, at a redemption price equal to 100 % of the liquidation preference of the shares of the Preferred Stock, plus any accrued and unpaid dividends to, but excluding, the redemption date, plus a make-whole amount designed to allow the Apax Investor to earn a total 8.0 % internal rate of return on such shares.
The Preferred Stock may not be sold or transferred without our prior written consent. The common stock issuable upon conversion of the Preferred Stock is not subject to this restriction. The restriction on the sale or transfer of the Preferred Stock does not apply to certain transfers to one or more permitted co-investors or transfers or pledges of the Preferred Stock pursuant to the terms of specified margin loans entered into by the Apax Investor as well as transfers effected pursuant to a merger, consolidation, or similar transaction consummated by us and transfers that are approved by our board of directors.
At any time after November 7, 2028, in the case of the Series A Preferred Stock, and October 6, 2029, in the case of the Series B Preferred Stock, or upon the occurrence of a change of control triggering event (as defined in the certificates of designation), the holders of the applicable series of Preferred Stock will have the right to cause us to redeem all of the outstanding shares of Preferred Stock for cash at a redemption price equal to 100 % of the liquidation preference of the shares of such series, plus any accrued and unpaid dividends to, but excluding, the redemption date. Therefore, the Preferred Stock has been classified as temporary equity on our condensed consolidated balance sheets as of April 30, 2024 and January 31, 2024, separate from permanent equity, as the potential required repurchase of the Preferred Stock, however remote in likelihood, is not solely under our control.
As of April 30, 2024, the Preferred Stock was not redeemable, and we have concluded that it is currently not probable of becoming redeemable, including from the occurrence of a change in control triggering event. The holders’ redemption rights which occur at November 7, 2028, in the case of the Series A Preferred Stock, and October 6, 2029, in the case of the Series B Preferred Stock, are not considered probable because there is a more than remote likelihood that the Mandatory Conversion may occur prior to such redemption rights. We therefore did not adjust the carrying amount of the Preferred Stock to its current redemption amount, which was its liquidation preference at April 30, 2024 plus accrued and unpaid dividends. As of April 30, 2024, the stated value of the liquidation preference for each series of Preferred Stock was $200.0 3.5
Future Tranche Right
We determined that our obligation to issue and the Apax Investor’s obligation to purchase 200,000 shares of the Series B Preferred Stock in connection with the completion of the Spin-Off and the satisfaction of other customary closing conditions (the “Future Tranche Right”) met the definition of a freestanding financial instrument as the Future Tranche Right is legally detachable and separately exercisable from the Series A Preferred Stock. At issuance, we allocated a portion of the proceeds from the issuance of the Series A Preferred Stock to the Future Tranche Right based upon its fair value at such time, with the remaining proceeds being allocated to the Series A Preferred Stock. The Future Tranche Right was remeasured at fair value each reporting period until the settlement of the right (at the time of the issuance of the Series B Preferred Stock), and changes in its fair value were recognized as a non-cash charge or benefit within other income (expense), net on the condensed consolidated statements of operations.
Upon issuance of the Series A Preferred Stock on May 7, 2020, the Future Tranche Right was recorded as an asset of $3.4 million, as the purchase price of the Series B Preferred Stock was greater than its estimated fair value at the expected settlement date. This resulted in a $203.4 million carrying value, before direct and incremental issuance costs, for the Series A Preferred Stock.
10. STOCKHOLDERS’ EQUITY
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Common Stock Dividends
We did no
Treasury Stock
We periodically purchase common stock from our directors, officers, and other employees to facilitate income tax withholding or payments in connection with the vesting of equity awards occurring during a Company-imposed trading blackout or lockup period. Any such repurchases of common stock occur at prevailing market prices and are recorded as treasury stock. When treasury shares are reissued, they are recorded at the average cost of the treasury shares acquired.
Stock Repurchase Programs
On December 7, 2022, we announced that our board of directors had authorized a stock repurchase program for the period from December 12, 2022 until January 31, 2025, whereby we may repurchase shares of common stock in an amount not to exceed, in the aggregate, $200.0 million during the repurchase period.
During the three months ended April 30, 2024, we repurchased approximately 1,233,000 shares of our common stock for a cost of $38.1 million, including excise tax of $0.3 million, under the current stock repurchase program, as well as an insignificant number of shares to facilitate income tax withholding or payments as described above. During the three months ended April 30, 2024, we retired all 1,234,000 shares, which was recorded as a reduction of common stock and additional paid-in capital. These shares were returned to the status of authorized and unissued shares. Our share repurchases in excess of issuances are subject to a 1% excise tax enacted by the Inflation Reduction Act (“IRA”). The excise tax of $0.3 million was recognized as part of the cost basis of shares acquired in the condensed consolidated statements of stockholders’ equity during the three months ended April 30, 2024. Subsequent to April 30, 2024 through May 30, 2024, we repurchased approximately 270,000 shares of our common stock for $8.5 million under this program.
During the three months ended April 30, 2023, we repurchased and retired 1,593,000 shares of our common stock for a cost of $60.1 million, including excise tax of $0.4 million.
Issuance of Convertible Preferred Stock
On December 4, 2019, in conjunction with the planned Spin-Off, we announced that an affiliate of Apax Partners would invest up to $400.0 million in us, in the form of convertible preferred stock. Under the terms of the Investment Agreement, the Apax Investor purchased $200.0 million of our Series A Preferred Stock, which closed on May 7, 2020. In connection with the completion of the Spin-Off, the Apax Investor purchased $200.0 million of our Series B Preferred Stock, which closed on April 6, 2021. As of April 30, 2024, Apax’s ownership in us on an as-converted basis was approximately 13.5 %. Please refer to Note 9, “Convertible Preferred Stock” for a more detailed discussion of the Apax investment.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss includes items such as foreign currency translation adjustments and unrealized gains and losses on derivative financial instruments designated as hedges. Accumulated other comprehensive loss is presented as a separate line item in the stockholders’ equity section of our condensed consolidated balance sheets. Accumulated other comprehensive loss items have no impact on our net income (loss) as presented in our condensed consolidated statements of operations.
The following table summarizes changes in the components of our accumulated other comprehensive loss by component for the three months ended April 30, 2024:
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| (in thousands) | Unrealized Gains (Losses) on Foreign Exchange Contracts Designated as Hedges | Foreign Currency Translation Adjustments | Total | |||||||||||||||||
| Accumulated other comprehensive income (loss) at January 31, 2024 | $ | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive loss before reclassifications | ( | ( | ( | |||||||||||||||||
| Amounts reclassified out of accumulated other comprehensive loss | ||||||||||||||||||||
| Net other comprehensive loss | ( | ( | ( | |||||||||||||||||
| Accumulated other comprehensive loss at April 30, 2024 | $ | ( | $ | ( | $ | ( | ||||||||||||||
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 loss into the condensed consolidated statements of operations, with presentation location, for the three months ended April 30, 2024 and 2023 were as follows:
| Three Months Ended April 30, | ||||||||||||||||||||
| (in thousands) | 2024 | 2023 | Financial Statement Location | |||||||||||||||||
Unrealized gains (losses) on derivative financial instruments: | ||||||||||||||||||||
| Foreign currency forward contracts | $ | $ | ( | Cost of recurring revenue | ||||||||||||||||
| ( | Cost of nonrecurring revenue | |||||||||||||||||||
| ( | Research and development, net | |||||||||||||||||||
| ( | Selling, general and administrative | |||||||||||||||||||
| ( | Total, before income taxes | |||||||||||||||||||
| ( | (Provision for) benefit from income taxes | |||||||||||||||||||
| $ | $ | ( | Total, net of income taxes | |||||||||||||||||
11. INCOME TAXES
Our interim provision for income taxes is measured using an estimated annual effective income tax rate, adjusted for discrete items that occur within the periods presented.
For the three months ended April 30, 2024, we recorded an income tax provision of $8.0 million on pretax income of $23.3 million, which represented an effective income tax rate of 34.1 %. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the U.S. taxation of certain foreign activities, offset by lower statutory rates in certain foreign jurisdictions.
For the three months ended April 30, 2023, we recorded an income tax provision of $4.4 million on pretax income of $8.0 million, which represented an effective income tax rate of 54.6 %. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the U.S. taxation of certain foreign activities, offset by lower statutory rates in certain foreign jurisdictions.
We evaluate the realizability of deferred income tax assets on a jurisdictional basis at each reporting date. A valuation allowance is established when it is more-likely-than-not that all or a portion of the deferred income tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred income tax assets are not more-likely-than-not realizable, we establish a valuation allowance. We determined that there is sufficient negative evidence to maintain the valuation allowances against certain state and foreign deferred income tax assets as a result of historical losses in
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the most recent three-year period in certain state and foreign jurisdictions. We intend to maintain valuation allowances until sufficient positive evidence exists to support a reversal.
We had unrecognized income tax benefits of $82.5 million and $83.3 million (excluding interest and penalties) as of April 30, 2024 and January 31, 2024, respectively, that if recognized, would impact our effective income tax rate. The accrued liability for interest and penalties was $7.2 million and $6.4 million at April 30, 2024 and January 31, 2024, respectively. Interest and penalties are recorded as a component of the provision for income taxes in our condensed consolidated statements of operations. We regularly assess the adequacy of our provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, we may adjust the reserves for unrecognized income tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. Further, we believe that it is reasonably possible that the total amount of unrecognized income tax benefits at April 30, 2024 could decrease by approximately $8.1 million in the next twelve months as a result of settlement of certain tax audits or lapses of statutes of limitation. Such decreases may involve the payment of additional income taxes, the adjustment of deferred income taxes including the need for additional valuation allowances, and the recognition of income tax benefits. Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate. We also believe that it is reasonably possible that new issues may be raised by tax authorities or developments in tax audits may occur, which would require increases or decreases to the balance of reserves for unrecognized income tax benefits; however, an estimate of such changes cannot reasonably be made.
The Organization for Economic Co-operation and Development (“OECD”) Pillar 2 guidelines address the increasing digitalization of the global economy, re-allocating taxing rights among countries. The European Union and many other member states have committed to adopting Pillar 2 which calls for a global minimum tax of 15% to be effective for tax years beginning in 2024. Certain jurisdictions in which we operate have enacted Pillar 2 legislation and others are considering changes to their tax laws to adopt the Pillar 2 proposals. We are monitoring developments and evaluating the impacts these new rules will have on our tax rate, including eligibility to qualify for safe harbor rules. We do not currently anticipate that the rules will have a material impact on our income tax provision this year.
12. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Our assets and liabilities measured at fair value on a recurring basis consisted of the following as of April 30, 2024 and January 31, 2024:
| April 30, 2024 | ||||||||||||||||||||
| Fair Value Hierarchy Category | ||||||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | |||||||||||||||||
| Assets: | ||||||||||||||||||||
| Money market funds | $ | $ | $ | |||||||||||||||||
| U.S. Treasury bills, classified as cash and cash equivalents | ||||||||||||||||||||
| Foreign currency forward contracts | ||||||||||||||||||||
| Contingent consideration receivable | ||||||||||||||||||||
| Total assets | $ | $ | $ | |||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Foreign currency forward contracts | $ | $ | $ | |||||||||||||||||
| Contingent consideration — business combinations | ||||||||||||||||||||
| Total liabilities | $ | $ | $ | |||||||||||||||||
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| January 31, 2024 | ||||||||||||||||||||
| Fair Value Hierarchy Category | ||||||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | |||||||||||||||||
| Assets: | ||||||||||||||||||||
| Money market funds | $ | $ | $ | |||||||||||||||||
| U.S. Treasury bills, classified as cash and cash equivalents | ||||||||||||||||||||
| Foreign currency forward contracts | ||||||||||||||||||||
| Contingent consideration receivable | ||||||||||||||||||||
| Total assets | $ | $ | $ | |||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Foreign currency forward contracts | $ | $ | $ | |||||||||||||||||
| Contingent consideration — business combinations | ||||||||||||||||||||
| Total liabilities | $ | $ | $ | |||||||||||||||||
On January 31, 2024, we completed the sale of a service business for manual quality managed services for no upfront cash consideration. We estimated the sale price under the sale agreement to be $6.0 million based on (i) the estimated fair value of our share of the future adjusted operating income (as defined in the agreement) of the business, to be paid annually over a minimum of six years following the transaction closing date, (ii) the amount by which the closing working capital of the business exceeds the working capital target, and (iii) the estimated amount of future collections of outstanding receivables as of the closing date from a certain customer, net of certain expenses. We determined the estimated fair value of the contingent consideration with the assistance of a third-party valuation specialist and estimates made by management. The fair value of the contingent consideration receivable was $2.3 million as of April 30, 2024, which is included within other assets on our condensed consolidated balance sheets. During the three months ended April 30, 2024, we did not receive any contingent consideration payments, and we recorded a charge of $0.3 million for the change in the estimated fair value of this contingent receivable.
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 three months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| 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 | $ | $ | ||||||||||||
Our estimated liability for contingent consideration represents potential payments of additional consideration for business combinations, payable if certain defined performance goals are achieved. Changes in fair value of contingent consideration are recorded in the condensed consolidated statements of operations within selling, general and administrative expenses.
There were no transfers between levels of the fair value measurement hierarchy during the three months ended April 30, 2024 and 2023.
Fair Value Measurements
Money Market Funds and U.S. Treasury Bills — We value our money market funds and U.S. treasury bills using quoted active market prices for such instruments.
Short-term Investments, Corporate Debt Securities, and Commercial Paper — The fair values of short-term investments, as well as corporate debt securities and commercial paper classified as cash equivalents, are estimated using observable market prices for identical securities that are traded in less-active markets, if available. When observable market prices for identical securities are not available, we value these short-term investments using non-binding market price quotes from brokers which
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we review for reasonableness using observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model.
Foreign Currency Forward Contracts — The estimated fair value of foreign currency forward contracts is based on quotes received from the counterparties thereto. These quotes are reviewed for reasonableness by discounting the future estimated cash flows under the contracts, considering the terms and maturities of the contracts and market foreign currency exchange rates using readily observable market prices for similar contracts.
Contingent Consideration Assets and Liabilities — Business Combinations and Divestitures — The fair value of the contingent consideration related to business combinations and divestitures is estimated using a probability-adjusted discounted cash flow model. These fair value measurements are based on significant inputs not observable in the market. The key internally developed assumptions used in these models are discount rates and the probabilities assigned to the milestones to be achieved. We remeasure the fair value of the contingent consideration at each reporting period, and any changes in fair value resulting from either the passage of time or events occurring after the acquisition date, such as changes in discount rates, or in the expectations of achieving the performance targets, are recorded within selling, general, and administrative expenses. Increases or decreases in discount rates would have inverse impacts on the related fair value measurements, while favorable or unfavorable changes in expectations of achieving performance targets would result in corresponding increases or decreases in the related fair value measurements. We utilized discount rates ranging from 6.1 % to 7.0 %, with a weighted average discount rate of 6.7 % in our calculation of the estimated fair values of our contingent consideration liabilities as of April 30, 2024. We utilized discount rates ranging from 9.6 % to 10.8 %, with a weighted average discount rate of 9.7 % in our calculation of the estimated fair value of our contingent consideration asset as of April 30, 2024. We utilized discount rates ranging from 5.8 % to 6.4 %, with a weighted average discount rate of 6.2 % in our calculations of the estimated fair values of our contingent consideration liabilities as of January 31, 2024. We utilized discount rates ranging from 7.5 % to 8.9 %, with a weighted average discount rate of 7.8 % in our calculation of the estimated fair value of our contingent consideration asset as of January 31, 2024.
As of January 31, 2024, $3.8 million of the fair value of the contingent consideration liability was based on actual achievement through the performance periods ended January 31, 2024, and was transferred to Level 2 of the fair value hierarchy as the fair value was determined based on other significant observable inputs. Payments of contingent consideration earned under this agreement were $3.0 million and there was no change in the fair value of the remaining contingent consideration obligation associated with this business combination for the three months ended April 30, 2024.
Other Financial Instruments
The carrying amounts of accounts receivable, contract assets, accounts payable, and accrued liabilities and other current liabilities approximate fair value due to their short maturities.
The estimated fair value of our Revolving Credit Facility borrowing was approximately $99.0 100.0 million outstanding balance on our Term Loan utilizing proceeds from borrowings under our Revolving Credit Facility. The estimated fair value of borrowings under our Revolving Credit Facility is based upon indicative market values provided by one of our lenders. The indicative prices provided to us at April 30, 2024 and January 31, 2024 did not significantly differ from par value.
The estimated fair values of our 2021 Notes were approximately $289.0 million and $281.0 million at April 30, 2024 and January 31, 2024, respectively. The estimated fair values of the 2021 Notes were determined based on quoted bid and ask prices in the over-the-counter market in which the 2021 Notes traded. We consider these inputs to be within Level 2 of the fair value hierarchy.
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, we also measure certain assets and liabilities at fair value on a nonrecurring basis. Our non-financial assets, including goodwill, intangible assets, operating lease right-of-use assets, and property, plant and equipment, are measured at fair value when there is an indication of impairment and the carrying amount exceeds the asset’s projected undiscounted cash flows. These assets are recorded at fair value only when an impairment charge is recognized.
Investments
In March 2023, we invested approximately $1.1 million in a privately-held company via a SAFE. In July 2023, we made a second SAFE investment of $0.5 million, and in January 2024, we made a third SAFE investment of $0.1 million for a total
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investment of approximately $1.7 million. The SAFE provided that, upon the completion by such company of a qualified equity financing, we would automatically receive the number of shares of capital stock of such company equal to the SAFE purchase amount divided by the Discount Price (as such term is defined in the SAFE). If there was a liquidity event affecting such company, such as a change in control or initial public offering, we would receive a cash payment equal to the greater of (a) the SAFE purchase amount or (b) the amount payable on the number of shares of common stock of such company equal to the SAFE purchase amount divided by the Liquidity Price (as such term is defined in the SAFE). Our investment was carried at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer and was included within other assets on the condensed consolidated balance sheets as of January 31, 2024. During the three months ended April 30, 2024, we completed the acquisition of this company. The approximately $1.7 million acquisition date fair value of the SAFE was included in the measurement of the consideration transferred. The company and its results of operations are now consolidated in our condensed consolidated financial statements, and the SAFE investment has been removed from our condensed consolidated balance sheet as of April 30, 2024. Please refer to Note 5, “Business Combinations, Asset Acquisitions, and Divestitures” for further discussion related to this acquisition.
The carrying amount of our noncontrolling equity investments in privately-held companies without readily determinable fair values was $5.1 no
13. DERIVATIVE FINANCIAL INSTRUMENTS
Our primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk, when deemed appropriate. We enter into these contracts in the normal course of business to mitigate risks and not for speculative purposes.
Foreign Currency Forward Contracts
Under our risk management strategy, we periodically use foreign currency forward contracts to manage our short-term exposures to fluctuations in operational cash flows resulting from changes in foreign currency exchange rates. These cash flow exposures result from portions of our forecasted operating expenses, primarily compensation and related expenses, which are transacted in currencies other than the U.S. dollar, most notably the Israeli shekel. We also periodically utilize foreign currency forward contracts to manage exposures resulting from forecasted customer collections to be remitted in currencies other than the applicable functional currency, and exposures from cash, cash equivalents and short-term investments denominated in currencies other than the applicable functional currency. These foreign currency forward contracts generally have maturities of no longer than twelve months , although occasionally we will execute a contract that extends beyond twelve months , depending upon the nature of the underlying risk.
We held outstanding foreign currency forward contracts with notional amounts of $6.3
Fair Values of Derivative Financial Instruments
The fair values of our derivative financial instruments and their classifications in our condensed consolidated balance sheets as of April 30, 2024 and January 31, 2024 were as follows:
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| Fair Value at | |||||||||||||||||
| April 30, | January 31, | ||||||||||||||||
| (in thousands) | Balance Sheet Classification | 2024 | 2024 | ||||||||||||||
| Derivative assets: | |||||||||||||||||
| Foreign currency forward contracts: | |||||||||||||||||
| Designated as cash flow hedges | Prepaid expenses and other current assets | $ | $ | ||||||||||||||
| Total derivative assets | $ | $ | |||||||||||||||
| Derivative liabilities: | |||||||||||||||||
| Foreign currency forward contracts: | |||||||||||||||||
| Designated as cash flow hedges | Accrued expenses and other current liabilities | $ | $ | ||||||||||||||
| Total derivative liabilities | $ | $ | |||||||||||||||
Derivative Financial Instruments in Cash Flow Hedging Relationships
The effects of derivative financial instruments designated as cash flow hedges on accumulated other comprehensive loss (“AOCL”) and on the condensed consolidated statement of operations for the three months ended April 30, 2024 and 2023 were as follows:
| Three Months Ended April 30, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| Net losses recognized in AOCL: | ||||||||||||||
| Foreign currency forward contracts | $ | ( | $ | ( | ||||||||||
Net gains (losses) reclassified from AOCL to the condensed consolidated statements of operations: | ||||||||||||||
| Foreign currency forward contracts | $ | $ | ( | |||||||||||
For information regarding the line item locations of the net gains (losses) on derivative financial instruments reclassified out of AOCL into the condensed consolidated statements of operations, see Note 10, “Stockholders’ Equity”.
14. STOCK-BASED COMPENSATION
Stock-Based Compensation Plan
On June 22, 2023, our stockholders approved the Verint Systems Inc. 2023 Long-Term Stock Incentive Plan (the “2023 Plan”). Upon approval of the 2023 Plan, new awards were no longer permitted under our prior stock-based compensation plan (the “2019 Plan”). Awards outstanding at June 22, 2023 under the 2019 Plan or other previous stock-based compensation plans were not impacted by the approval of the 2023 Plan. Collectively, our stock-based compensation plans are referred to herein as the “Plans”.
The 2023 Plan authorizes our board of directors to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance awards, other stock-based awards, and performance compensation awards. Subject to adjustment as provided in the 2023 Plan, up to an aggregate of (i) 9,000,000 shares of our common stock plus (ii) 3,982,168 shares of our common stock available for issuance under the 2019 Plan as of June 22, 2023, plus (iii) the number of shares of our common stock that become available for issuance as a result of awards made under the 2019 Plan or the 2023 Plan that are forfeited, cancelled, exchanged, or that terminate or expire, may be issued or transferred in connection with awards under the 2023 Plan. Each stock option or stock-settled stock appreciation right granted under the 2023 Plan will reduce the available plan capacity by one share and each other award denominated in shares that is granted under the 2023 Plan will reduce the available plan capacity by 1.9 shares.
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Stock-Based Compensation Expense
We recognized stock-based compensation expense in the following line items on the condensed consolidated statements of operations for the three months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| Cost of revenue — recurring | $ | $ | ||||||||||||
| Cost of revenue — nonrecurring | ||||||||||||||
| Research and development, net | ||||||||||||||
| Selling, general and administrative | ||||||||||||||
| Total stock-based compensation expense | $ | $ | ||||||||||||
The following table summarizes stock-based compensation expense by type of award for the three months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| Restricted stock units and restricted stock awards | $ | $ | ||||||||||||
| Stock bonus program and bonus share program | ||||||||||||||
| Total equity-settled awards | ||||||||||||||
| Phantom stock units (cash-settled awards) | ||||||||||||||
| Total stock-based compensation expense | $ | $ | ||||||||||||
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.
Awards under our stock bonus and bonus share programs are accounted for as liability-classified awards, because the obligations are based predominantly on fixed monetary amounts that are generally known at inception of the obligation, to be settled with a variable number of shares of our common stock, which for a portion of the awards under our stock bonus program is determined using a discounted average price of our common stock.
Restricted Stock Units and Performance Stock Units
We periodically award RSUs to our directors, officers, and other employees. These awards contain various vesting conditions and are subject to certain restrictions and forfeiture provisions prior to vesting. Some of these awards to executive officers and certain other employees vest upon the achievement of specified performance goals or market conditions (performance stock units or “PSUs”).
The following table (“Award Activity Table”) summarizes activity for RSUs, PSUs, and other stock awards that reduce available Plan capacity under the Plans for the three months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | ||||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||||
(in thousands, except grant date fair values) | Shares or Units | Weighted-Average Grant Date Fair Value | Shares or Units | Weighted-Average Grant Date Fair Value | ||||||||||||||||||||||
| Beginning balance | $ | $ | ||||||||||||||||||||||||
| Granted | $ | $ | ||||||||||||||||||||||||
| Released | ( | $ | ( | $ | ||||||||||||||||||||||
| Forfeited | ( | $ | ( | $ | ||||||||||||||||||||||
| Ending balance | $ | $ | ||||||||||||||||||||||||
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With respect to our stock bonus program, the activity presented in the table above only includes shares earned and released in consideration of the discount provided under that program. Consistent with the provisions of the Plans under which such shares are issued, other shares issued under the stock bonus program are not included in the table above because they do not reduce available plan capacity (since such shares are deemed to be purchased by the grantee at fair value in lieu of receiving an earned cash bonus). Activity presented in the table above includes all shares awarded and released under the bonus share program. Further details appear below under “Stock Bonus Program and Bonus Share Program”.
Our RSU and PSU awards may include a provision which allows the awards to be settled with cash payments upon vesting, rather than with delivery of common stock, at the discretion of our board of directors. As of April 30, 2024, for such awards that are outstanding, settlement with cash payments was not considered probable, and therefore these awards have been accounted for as equity-classified awards and are included in the table above.
The following table summarizes PSU activity in isolation under the Plans for the three months ended April 30, 2024 and 2023 (these amounts are also included in the Award Activity Table above for 2024 and 2023):
| Three Months Ended April 30, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| Beginning balance | ||||||||||||||
| Granted | ||||||||||||||
| Released | ( | ( | ||||||||||||
| Forfeited | ( | ( | ||||||||||||
| Ending balance | ||||||||||||||
Excluding PSUs, we granted 1,903,000 RSUs during the three months ended April 30, 2024.
As of April 30, 2024, there was approximately $117.3 million of total unrecognized compensation expense, net of estimated forfeitures, related to unvested RSUs, which is expected to be recognized over a weighted-average period of 2.2 years.
Stock Bonus Program and Bonus Share Program
Our stock bonus program permits eligible employees to receive a portion of their earned bonuses, otherwise payable in cash, in the form of discounted shares of our common stock. Executive officers are eligible to participate in this program to the extent that capacity remains available under the program following the enrollment of all other participants. Shares awarded to executive officers with respect to the discount feature of the program are subject to a one-year vesting period. This program is subject to annual funding approval by our board of directors and an annual cap on the number of shares that can be issued. Subject to these limitations, the number of shares to be issued under the program for a given year is determined using a five-day trailing average price of our common stock when the awards are calculated, reduced by a discount determined by the board of directors each year (the “discount”). To the extent that this program is not funded in a given year or the number of shares of common stock needed to fully satisfy employee enrollment exceeds the annual cap, the applicable portion of the employee bonuses will generally revert to being paid in cash.
Under our bonus share program, we may provide discretionary bonuses to employees or pay earned bonuses that are outside the stock bonus program in the form of shares of common stock. Unlike the stock bonus program, there is no enrollment for this program and no discount feature.
For bonuses in respect of the year ended January 31, 2024, our board of directors approved the use of up to 300,000 shares of common stock in the aggregate for awards under these two programs, with up to 200,000 of these shares of common stock, and a discount of 15 % approved for awards under our stock bonus program. We currently expect to issue approximately 22,000 shares under the stock bonus program and 178,000 shares under the bonus share program, in respect of the year ended January 31, 2024, during the first half of the year ending January 31, 2025.
In March 2024, our board of directors approved the use of up to 300,000 shares of common stock in the aggregate under these two programs, with up to 200,000 of these shares of common stock, and a discount of 15 %, for awards under our stock bonus program for the performance period ending January 31, 2025. Any shares earned under these programs will be issued during the year ending January 31, 2026.
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15. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
CTI Litigation
In March 2009, one of our former employees, Ms. Orit Deutsch, commenced legal actions in Israel against our former primary Israeli subsidiary, Cognyte Technologies Ltd. (formerly known as Verint Systems Limited or “VSL”) (Case Number 4186/09) and against our former affiliate CTI (Case Number 1335/09). Also, in March 2009, a former employee of Comverse Limited (CTI’s primary Israeli subsidiary at the time), Ms. Roni Katriel, commenced similar legal actions in Israel against Comverse Limited (Case Number 3444/09). In these actions, the plaintiffs generally sought to certify class action suits against the defendants on behalf of current and former employees of VSL and Comverse Limited who had been granted stock options in Verint and/or CTI and who were allegedly damaged as a result of a suspension on option exercises during an extended filing delay period that is discussed in our and CTI’s historical public filings. On June 7, 2012, the Tel Aviv District Court, where the cases had been filed or transferred, allowed the plaintiffs to consolidate and amend their complaints against the three defendants: VSL, CTI, and Comverse Limited.
On October 31, 2012, CTI distributed all of the outstanding shares of common stock of Comverse, Inc., its principal operating subsidiary and parent company of Comverse Limited, to CTI’s shareholders (the “Comverse Share Distribution”). In the period leading up to the Comverse Share Distribution, CTI either sold or transferred substantially all of its business operations and assets (other than its equity ownership interests in Verint and in its then-subsidiary, Comverse, Inc.) to Comverse, Inc. or to unaffiliated third parties. As the result of these transactions, Comverse, Inc. became an independent company and ceased to be affiliated with CTI, and CTI ceased to have any material assets other than its equity interests in Verint. Prior to the completion of the Comverse Share Distribution, the plaintiffs sought to compel CTI to set aside up to $150.0 million in assets to secure any future judgment, but the District Court did not rule on this motion. In February 2017, Mavenir Inc. became successor-in-interest to Comverse, Inc.
On February 4, 2013, Verint acquired the remaining CTI shell company in a merger transaction (the “CTI Merger”). As a result of the CTI Merger, Verint assumed certain rights and liabilities of CTI, including any liability of CTI arising out of the foregoing legal actions. However, under the terms of a Distribution Agreement entered into in connection with the Comverse Share Distribution, we, as successor to CTI, are entitled to indemnification from Comverse, Inc. (now Mavenir) for any losses we may suffer in our capacity as successor to CTI related to the foregoing legal actions.
Following an unsuccessful mediation process, on August 28, 2016, the District Court (i) denied the plaintiffs’ motion to certify the suit as a class action with respect to all claims relating to Verint stock options, (ii) dismissed the motion to certify the suit against VSL and Comverse Limited, and (iii) approved the plaintiffs’ motion to certify the suit as a class action against CTI with respect to claims of current or former employees of Comverse Limited (now part of Mavenir) or of VSL who held unexercised CTI stock options at the time CTI suspended option exercises. The court also ruled that the merits of the case would be evaluated under New York law.
As a result of this ruling (which excluded claims related to Verint stock options from the case), one of the original plaintiffs in the case, Ms. Deutsch, was replaced by a new representative plaintiff, Mr. David Vaaknin. CTI appealed portions of the District Court’s ruling to the Israeli Supreme Court. On August 8, 2017, the Israeli Supreme Court partially allowed CTI’s appeal and ordered the case to be returned to the District Court to determine whether a cause of action exists under New York law based on the parties’ expert opinions.
Following two unsuccessful rounds of mediation in mid to late 2018 and in mid-2019, the proceedings resumed. On April 16, 2020, the District Court accepted the plaintiffs’ application to amend the motion to certify a class action and set deadlines for filing amended pleadings by the parties. CTI submitted a motion to appeal the District Court’s decision to the Israeli Supreme Court, as well as a motion to stay the proceedings in the District Court pending the resolution of the appeal. On July 6, 2020, the Israeli Supreme Court granted the motion for a stay. On July 27, 2020, the plaintiffs filed their response on the merits of the motion for leave to appeal. On December 15, 2021, the Israeli Supreme Court rejected CTI’s motion to appeal and the proceedings in the District Court resumed.
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At the recommendation of the District Court, in June 2022, the parties conducted another round of mediation in New York. On July 10, 2022, the parties reached an agreement to settle the matter on terms set forth in a settlement agreement that was executed by all parties and submitted a motion for approval of the settlement agreement to the District Court. Under the terms of the settlement agreement, subject to full and final waiver, Mavenir Inc. and/or Comverse, Inc. and/or Mavenir Ltd. agreed to pay a total of $16.0 million (such amount to be paid in three phases as set forth in the settlement agreement) as compensation to the plaintiffs and members of the class. The compensation amount is comprehensive, final and absolute and includes within it all the amounts and expenses to be paid in connection with the settlement agreement. Under the terms of an associated guaranty agreement, Verint has guaranteed the payment of the compensation amount in the event it is not paid by the primary obligors. On February 7, 2023, the District Court approved the settlement without material changes. As of April 30, 2024, all installments of the compensation amount had been paid by Mavenir. There was no impact to our condensed consolidated statements of operations.
Under the terms of the Separation and Distribution Agreement entered into between Verint and Cognyte, Cognyte has agreed to indemnify Verint for Cognyte’s share of any losses that Verint may suffer related to the foregoing legal actions either in its capacity as successor to CTI, to the extent not indemnified by Mavenir, or due to its former ownership of Cognyte and VSL.
Unfair Competition Litigation and Related Investigation
As previously disclosed, Verint Americas Inc., as successor to ForeSee Results, Inc. (“ForeSee”), was the defendant in two Eastern District of Michigan cases captioned ACSI LLC v. ForeSee Results, Inc., and CFI Group USA LLC v. Verint Americas Inc. The former case was filed on October 24, 2018 against ForeSee by American Customer Satisfaction Index, LLC (“ACSI LLC”) (Case No. 2:18-cv-13319) and alleged infringement of two federally registered trademarks and common law unfair competition under federal and state law. The latter case was filed on September 5, 2019 against Verint Americas Inc. (as successor in interest to ForeSee) by CFI Group USA LLC (“CFI”) (Case No. 2:19-cv-12602) and alleged unfair competition and false advertising under federal and state law, as well as tortious interference with contract. We believe that the claims asserted by the plaintiffs in these matters were without merit. Following the filing of the Eastern District of Michigan litigation, ForeSee filed affirmative litigation in the U.S. District Court for the District of Delaware (Case No. 1:21-cv-00674, Complaint filed on May 7, 2021) against ACSI LLC, CFI, Claes Fornell, and CFI Software LLC (the “Fornell Group”) asserting fraud and other claims against ACSI LLC, CFI, Fornell Group, and CFI Software for, among other things, their breach of a “Joinder and Waiver Agreement” entered into in connection with the December 2013 sale of ForeSee to its previous owner and misrepresentations in the associated deal documents. Verint acquired ForeSee in December 2018.
In April 2023, the parties reached an agreement in principle to settle these actions, and on June 1, 2023, the parties signed a definitive settlement agreement. Under the terms of the settlement agreement, Verint paid $9.0 million to the Fornell Group in July 2023 and the parties have agreed to certain restrictive covenants with respect to the future business activities of both ForeSee and the Fornell Group. The agreement provides that the settlement does not constitute a ruling on the merits, an admission as to any issue of fact or principle of law, or an admission of liability or wrongdoing by either ForeSee or Verint. Following the execution of the settlement agreement, the two cases in Michigan against us have been dismissed, and the case in Delaware filed by us has been dismissed.
The U.S. Attorney’s Office for the Eastern District of Michigan’s Civil Division (“USAO”) also conducted a False Claims Act investigation concerning allegations ForeSee and/or Verint failed to provide the federal government the services described in certain government contracts related to ForeSee’s products inherited by Verint in the ForeSee acquisition. Verint received a Civil Investigation Demand (“CID”) in connection with this investigation and provided responses. The False Claims Act contains provisions that allow for private persons (“relators”) to initiate actions by filing claims under seal. We believed and subsequently confirmed that this investigation was initiated by ACSI LLC and CFI in coordination with the Eastern District of Michigan litigation discussed above.
In March 2023, Verint and the Assistant U.S. Attorney overseeing the USAO investigation reached an agreement in principle to resolve the USAO matter. The definitive settlement agreement, which provides that it is not an admission of liability by us, was signed in July 2023 including by the USAO and the relators. Under the terms of the settlement agreement, Verint paid $7.0 million to the government in August 2023 (a portion of which is payable by the government to the relators) in exchange for a release of the asserted claims, and an associated civil action brought by the relators has been dismissed.
As of January 31, 2023, we recognized a $7.0 million legal settlement liability in respect of the USAO matter and a $3.5 million legal settlement liability in respect of the ACSI and CFI matters within accrued expenses and other current liabilities, and a corresponding insurance recovery receivable in prepaid expenses and other current assets on our consolidated balance sheets. These loss accruals and insurance recoveries were offset within selling, general and administrative expenses in our consolidated
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statements of operations for the year ended January 31, 2023, resulting in no
The incremental settlement costs of $5.5 million related to the ACSI and CFI matters as a result of the settlement described above was included within selling, general and administrative expenses in our consolidated statement of operations for the year ended January 31, 2024. We reached a final settlement with one of our insurance carriers for a total cumulative insurance recovery of $14.5 million for the losses we incurred related to these actions, which offset settlement and legal expenses during the year ended January 31, 2023. We collected $2.0 million during the year ended January 31, 2023 and $12.5 million was collected in April 2023.
We are a party to various other litigation matters and claims that arise from time to time in the ordinary course of our business. While we believe that the ultimate outcome of any such current matters will not have a material adverse effect on us, their outcomes are not determinable and negative outcomes may adversely affect our financial position, liquidity, or results of operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis is provided to assist readers in understanding our financial condition, results of operations, and cash flows. This discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended January 31, 2024 and our unaudited condensed consolidated financial statements and notes thereto contained in 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 under “Cautionary Note on Forward-Looking Statements”.
Overview
Impact of Macroeconomic Developments
Our results of operations may be significantly influenced by general macroeconomic and geopolitical conditions, such as the war in Ukraine and the Israel-Hamas war, foreign currency fluctuations, increased interest rates, continued inflation, recession risks, and existing and new domestic and foreign laws and regulations, all of which are beyond our control. We believe that these global macroeconomic conditions have impacted customer and partner spending decisions, and resulted in increased costs.
We continue to monitor events associated with the war in Ukraine and the Israel-Hamas war and their global impacts, including applicable trade compliance or other legal requirements regarding permissible activities in the respective regions. Based on the current situation, we do not believe these conflicts have had a material impact on our results of operations, financial condition, liquidity, or cash flows. However, if the conflicts worsen or expand, leading to greater global economic disruptions and uncertainty, our business and results of operations could be materially impacted.
For additional information on the potential impact of other macroeconomic and geopolitical conditions on our business, see the “Risk Factors” section included in our Annual Report on Form 10-K for the year ended January 31, 2024. For additional information on the potential impact of foreign currency exchange rates, see the “Foreign Currency Exchange Rates’ Impact on Results of Operations” section below.
Recent Developments
On January 31, 2024, we completed the sale of a services business for manual quality managed services. Today, our platform includes an AI-powered solution for automating the quality monitoring process. We expect our customers to adopt AI over time and believe that a people-centric managed services offering is no longer core to our offering. During the three months ended January 31, 2024, we recognized a pre-tax loss on the sale of $9.7 million, which was recorded as part of selling, general, and administrative expenses in our consolidated statement of operations, and included $0.8 million of cumulative foreign translation loss that was released from accumulated other comprehensive loss. The divested services business generated $6.8 million of revenue during the three months ended April 30, 2023, and several hundred employees dedicated to this managed services business were transferred or terminated as part of the transaction.
Our Business
Verint is a leader in customer experience (“CX”) automation. The world’s most iconic brands – including more than 80 of the Fortune 100 companies – use the Verint Open Platform and our team of AI-powered bots to deliver tangible AI business outcomes across the enterprise. Verint is uniquely positioned to help brands increase CX automation with our differentiated AI-powered Open Platform.
Verint is headquartered in Melville, New York, and has approximately 15 offices worldwide, in addition to a number of on-demand, flexible coworking spaces. We have approximately 3,700 employees plus a few hundred contractors around the globe focused on helping brands increase CX automation.
Key Trends
We believe there are three key market trends that are benefiting Verint today: enterprise adoption of AI and CX automation, a changing workforce, and elevated customer expectations.
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•Enterprise Adoption of AI and CX Automation: We believe that AI is at or near the top of the list of investment priorities for most enterprises and customer engagement presents one of the best opportunities for brands to achieve significant ROI by investing in CX automation. Brands today are challenged to delight their customers while facing limited budgets and resources. As a result, organizations are turning to AI-powered platforms specifically designed for the customer engagement domain to increase the level of their CX automation rather than hire additional employees. Recent advancements in AI technology have enabled Verint to deliver a large team of AI-powered bots and an open platform specifically designed to help brands increase CX automation.
•A Changing Workforce: Brands are facing unprecedented challenges when it comes to how they manage their changing workforce. Increasingly, brands are managing a hybrid workforce of agents and bots, with employees that may be working from anywhere. Providing flexibility for where employees work creates greater challenges in managing and coaching employee teams. And because of the limited resources that are available, brands must drive greater workforce efficiency. They need to find ways to use technology, like AI-powered bots, to augment their workforce. Brands recognize the need to leverage data and automation to achieve greater efficiency. In addition, the importance of employee experience continues to grow, and brands must quickly evolve how they recruit, onboard, and retain employees. We believe that these trends benefit Verint as they create demand for new AI-based solutions that can shape the future of work, with a workforce of people and AI-powered bots working together, increased automation, greater employee flexibility, and a greater focus on the voice of the employees.
•Elevated Customer Expectations: Customer expectations for faster, more consistent, and contextual responses continue to rise and meeting those expectations is becoming increasingly difficult with legacy technology. The proliferation in customer channels and the desire of customers to seamlessly shift between channels creates a more complex customer journey for brands to manage and support. Customers also expect brands to have a deep understanding of the customer’s relationship with that brand — an understanding that is unified across the enterprise, regardless of whether the customer touchpoint is in the contact center, on a website, through a mobile app, in the back-office, or in a branch. To develop that deep understanding, leading brands recognize the need to use specialized, AI-powered solutions to both fuse the data that has traditionally existed in silos across the enterprise and analyze the data to inform and automate the customer experience. We believe that this trend benefits Verint as it creates demand for new AI-powered bots and other solutions that help brands support complex customer journeys and increase automation to meet elevated customer expectations.
While we continue to see significant demand for our solutions, including due to the foregoing key trends, we believe that current macroeconomic conditions, as described above, are impacting customer and partner spending decisions. Future impacts on our business and financial results as a result of these conditions are not estimable at this time and depend, in part, on the extent to which these conditions improve or worsen.
Critical Accounting Policies and Estimates
Note 1, “Summary of Significant Accounting Policies” to the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended January 31, 2024 describes the significant accounting policies and methods used in the preparation of the condensed consolidated financial statements appearing in this report. The accounting policies that reflect our more significant estimates, judgments and assumptions in the preparation of our condensed consolidated financial statements are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of our Annual Report on Form 10-K for the year ended January 31, 2024, and include the following:
•Revenue recognition;
•Accounting for business combinations;
•Goodwill and other acquired intangible assets;
•Income taxes; and
•Accounting for stock-based compensation.
There were no significant changes to our critical accounting policies and estimates during the three months ended April 30, 2024.
Results of Operations
Seasonality and Cyclicality
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As is typical for many software and technology companies, our business is subject to seasonal and cyclical factors. In most years, our revenue and operating income are typically highest in the fourth quarter and lowest in the first quarter (prior to the impact of unusual or nonrecurring items). In addition, we generally receive a higher volume of orders in the last month of a quarter, with orders concentrated in the latter 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 a variety of seasonal and cyclical factors are common in the software and technology industry, these industry patterns should not be considered a reliable indicator of our future revenue or financial performance. Many other factors, including the timing of renewals for larger unbundled SaaS contracts and general economic conditions, may also have an impact on our business and financial results in a particular quarter.
Overview of Operating Results
The following table sets forth a summary of certain key financial information for the three months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | ||||||||||||||
| (in thousands, except per share data) | 2024 | 2023 | ||||||||||||
| Revenue | $ | 221,277 | $ | 216,566 | ||||||||||
| Operating income | $ | 24,445 | $ | 8,772 | ||||||||||
| Net income (loss) attributable to Verint Systems Inc. common shares | $ | 10,041 | $ | (1,905) | ||||||||||
| Net income (loss) per common share attributable to Verint Systems Inc.: | ||||||||||||||
| Basic | $ | 0.16 | $ | (0.03) | ||||||||||
| Diluted | $ | 0.16 | $ | (0.03) | ||||||||||
Three Months Ended April 30, 2024 compared to Three Months Ended April 30, 2023. Our revenue increased approximately $4.7 million, from $216.6 million in the three months ended April 30, 2023 to $221.3 million in the three months ended April 30, 2024. The increase consisted of a $7.1 million increase in recurring revenue, partially offset by a $2.4 million decrease in nonrecurring revenue. For additional details on our revenue by category, see “—Revenue”. Revenue in the Americas, in Europe, the Middle East and Africa (“EMEA”), and in the Asia-Pacific (“APAC”) regions represented approximately 73%, 18%, and 9% of our total revenue, respectively, in the three months ended April 30, 2024, compared to approximately 70%, 20%, and 10%, respectively, in the three months ended April 30, 2023. Further details of changes in revenue are provided below.
We reported operating income of $24.4 million in the three months ended April 30, 2024 compared to operating income of $8.8 million in the three months ended April 30, 2023. The increase in operating income was primarily due to a $9.3 million increase in gross profit, from $148.2 million to $157.5 million, and a $6.3 million decrease in operating expenses, from $139.4 million to $133.1 million. The decrease in operating expenses consisted of an $8.0 million decrease in selling, general and administrative expenses, and a $3.2 million decrease in amortization of other acquired intangible assets, partially offset by a $4.9 million increase in net research and development expenses. Further details of changes in operating income are provided below.
Net income attributable to Verint Systems Inc. common shares was $10.0 million and diluted net income per common share was $0.16 in the three months ended April 30, 2024 compared to a net loss attributable to Verint Systems Inc. common shares of $1.9 million and diluted net loss per common share of $0.03 in the three months ended April 30, 2023. The increase in net income attributable to Verint Systems Inc. common shares in the three months ended April 30, 2024 was primarily due to a $15.6 million increase in operating income as described above, and a $0.2 million decrease in net income attributable to noncontrolling interests, partially offset by a $3.6 million increase in our provision for income taxes, and a $0.3 million increase in total other expense, net. Further details of these changes are provided below.
As of April 30, 2024, we employed approximately 3,700 employees plus a few hundred contractors, as compared to approximately 4,200 employees plus a few hundred contractors at April 30, 2023. The majority of the headcount reduction from the prior period was related to the divestment of our services business for manual quality managed services during the three months ended January 31, 2024. Refer to the “Recent Developments” section above for further details regarding the divestiture.
Foreign Currency Exchange Rates’ Impact on Results of Operations
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A portion of our business is conducted in currencies other than the U.S. dollar, and therefore our revenue, cost of revenue, and operating expenses are affected by fluctuations in applicable foreign currency exchange rates.
When comparing average exchange rates for the three months ended April 30, 2024 to average exchange rates for the three months ended April 30, 2023, the U.S. dollar strengthened relative to the Israeli shekel and the Australian dollar and weakened relative to the British pound sterling, resulting in an overall increase in our revenue and decrease in our expenses on a U.S. dollar-denominated basis. For the three months ended April 30, 2024, had foreign currency exchange rates remained unchanged from rates in effect for the three months ended April 30, 2023, our revenue would have been approximately $0.1 million lower and our cost of revenue and operating expenses on a combined basis would have been approximately $0.2 million higher, which would have resulted in a $0.3 million decrease in our operating income.
Revenue
We derive and report our revenue in two categories: (a) recurring revenue, which includes bundled SaaS, unbundled SaaS, hosting services, optional managed services, initial and renewal support revenue, and product warranties, and (b) nonrecurring revenue, which primarily consists of perpetual licenses, hardware, installation services, business advisory consulting and training services, and patent license royalties.
The following table sets forth revenue by category for the three months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | % Change | |||||||||||||||||||
| (in thousands) | 2024 | 2023 | 2024-2023 | |||||||||||||||||
| Recurring revenue | ||||||||||||||||||||
| Bundled SaaS revenue | $ | 65,695 | $ | 59,453 | 10% | |||||||||||||||
| Unbundled SaaS revenue | 75,288 | 57,695 | 30% | |||||||||||||||||
| Total SaaS revenue | 140,983 | 117,148 | 20% | |||||||||||||||||
| Optional managed services revenue | 5,168 | 12,865 | (60)% | |||||||||||||||||
| Support revenue | 27,377 | 36,426 | (25)% | |||||||||||||||||
| Total recurring revenue | 173,528 | 166,439 | 4% | |||||||||||||||||
| Nonrecurring revenue | ||||||||||||||||||||
| Perpetual revenue | 24,900 | 24,334 | 2% | |||||||||||||||||
Professional services and other revenue | 22,849 | 25,793 | (11)% | |||||||||||||||||
| Total nonrecurring revenue | 47,749 | 50,127 | (5)% | |||||||||||||||||
| Total revenue | $ | 221,277 | $ | 216,566 | 2% | |||||||||||||||
Recurring Revenue
Three Months Ended April 30, 2024 compared to Three Months Ended April 30, 2023. Recurring revenue increased approximately $7.1 million, or 4%, from $166.4 million in the three months ended April 30, 2023 to $173.5 million in the three months ended April 30, 2024. The increase consisted of a $23.8 million increase in SaaS revenue, partially offset by a $9.0 million decrease in support revenue and a $7.7 million decrease in optional managed services revenue. The increase in SaaS revenue was due to increases in both bundled and unbundled SaaS revenue. The increase in unbundled SaaS revenue was primarily due to increased renewal and expansion transactions. The increase in bundled SaaS revenue was primarily due to new customer contracts and existing customers expanding their use of our cloud platform. The decrease in support revenue was primarily due to customers migrating to our SaaS solutions. The decrease in optional managed services revenue was primarily attributable to the divestiture of a manual quality managed services business on January 31, 2024. The divested services business generated $6.8 million of revenue during the three months ended April 30, 2023, with no corresponding revenue in the current period.
We expect our revenue mix to continue to shift to our SaaS offerings, which is consistent with our cloud-first strategy and a general market shift from on-premises solutions to SaaS offerings, with an increasing portion of the mix coming from our bundled SaaS offerings. Bundled SaaS revenue is generally recognized ratably over the subscription term, while unbundled SaaS revenue is typically recognized upfront upon delivery of the license keys, or when the license term commences, if later. As a result, our revenue may fluctuate from period to period due to the revenue mix in each period, which is influenced by customer buying preferences. When the percentage of unbundled SaaS to bundled SaaS sold or renewed in a period increases, revenue from such transactions will generally be higher in that period (and lower in future periods) than if the percentage of
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bundled SaaS to unbundled SaaS were higher. Additionally, a multi-year unbundled SaaS contract will generally result in greater revenue recognition upfront than a one-year unbundled SaaS contract.
While we continue to see significant demand for our solutions as our customers are looking to purchase AI-powered solutions, we believe that current macroeconomic factors, as described above, are impacting customer and partner spending decisions.
Nonrecurring Revenue
Three Months Ended April 30, 2024 compared to Three Months Ended April 30, 2023. Nonrecurring revenue decreased approximately $2.4 million, or 5%, from $50.1 million in the three months ended April 30, 2023 to $47.7 million in the three months ended April 30, 2024. The decrease consisted of a $3.0 million decrease in professional services and other revenue, partially offset by a $0.6 million increase in perpetual revenue. The decrease in professional services and other revenue was primarily due to a decrease in implementation services in the period as a result of product innovation and the overall shift in our business to a cloud-based model. The increase in perpetual revenue was primarily due to an increase in demand for our offerings that include hardware with embedded software.
Cost of Revenue
The following table sets forth the cost of revenue by recurring and nonrecurring, as well as amortization of acquired technology for the three months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | % Change | |||||||||||||||||||
| (in thousands) | 2024 | 2023 | 2024-2023 | |||||||||||||||||
| Cost of recurring revenue | $ | 35,923 | $ | 39,643 | (9)% | |||||||||||||||
| Cost of nonrecurring revenue | 26,480 | 26,795 | (1)% | |||||||||||||||||
| Amortization of acquired technology | 1,358 | 1,965 | (31)% | |||||||||||||||||
| Total cost of revenue | $ | 63,761 | $ | 68,403 | (7)% | |||||||||||||||
Cost of Recurring Revenue
Cost of recurring revenue primarily consists of employee compensation and related expenses for our cloud operations and support teams, contractor costs, cloud infrastructure and data center costs, travel expenses relating to optional managed services and support, and royalties due to third parties for software components that are embedded in our cloud-based solutions. Cost of recurring revenue also includes amortization of capitalized software development costs, stock-based compensation expenses, facility costs, and other allocated overhead expenses.
Three Months Ended April 30, 2024 compared to Three Months Ended April 30, 2023. Cost of recurring revenue decreased approximately $3.7 million, or 9%, from $39.6 million in the three months ended April 30, 2023 to $35.9 million in the three months ended April 30, 2024. The decrease was primarily due to a reduction in service and support costs due to lower personnel costs as a result of the divestiture mentioned above, partially offset by an increase in the cost of third-party software components in order to support our cloud-based solutions. Our recurring revenue gross margins increased from 76% in the three months ended April 30, 2023 to 79% in the three months ended April 30, 2024, primarily due to a favorable change in offering mix as SaaS revenue carries higher gross margins than our optional managed services and support revenue, and a decrease in recurring costs.
Cost of Nonrecurring Revenue
Cost of nonrecurring revenue primarily consists of employee compensation and related expenses, contractor costs, travel expenses relating to installation, training and consulting services, hardware material costs, and royalties due to third parties for software components that are embedded in our on-premises software solutions. Cost of nonrecurring 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.
Three Months Ended April 30, 2024 compared to Three Months Ended April 30, 2023. Cost of nonrecurring revenue decreased approximately $0.3 million, or 1%, from $26.8 million in the three months ended April 30, 2023 to $26.5 million in the three months ended April 30, 2024. The decrease was primarily driven by a decrease in employee compensation and related expenses due to a decrease in headcount supporting our nonrecurring revenue offerings. Our nonrecurring gross margins decreased from
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47% in the three months ended April 30, 2023 to 45% in the three months ended April 30, 2024, primarily due to a less favorable revenue and offering mix and nonrecurring revenue decreasing at a faster rate than nonrecurring costs driven by the continued shift in spending by our customers towards our SaaS offerings.
Amortization of Acquired Technology
Amortization of acquired technology consists of the amortization of technology assets acquired in connection with business combinations.
Three Months Ended April 30, 2024 compared to Three Months Ended April 30, 2023. Amortization of acquired technology decreased approximately $0.6 million, or 31%, from $2.0 million in the three months ended April 30, 2023 to $1.4 million in the three months ended April 30, 2024. The decrease was attributable to acquired technology intangible assets from historical business combinations becoming fully amortized, partially offset by amortization expense associated with acquired technology intangible assets from recent business combinations.
Further discussion regarding our business combinations appears in Note 5, “Business Combinations, Asset Acquisitions, and Divestitures” to our condensed consolidated financial statements included under Part I, Item 1 of this report.
Research and Development, Net
Research and development expenses, net (“R&D”) consist primarily of personnel and subcontracting expenses, facility costs, and other allocated overhead, net of certain software development costs that are capitalized and benefits derived from participation in government-sponsored programs in certain jurisdictions for the support of research and development activities conducted in those locations. 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 R&D for the three months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | % Change | |||||||||||||||||||
| (in thousands) | 2024 | 2023 | 2024-2023 | |||||||||||||||||
| Research and development, net | $ | 36,730 | $ | 31,782 | 16% | |||||||||||||||
Three Months Ended April 30, 2024 compared to Three Months Ended April 30, 2023. R&D increased approximately $4.9 million, or 16%, from $31.8 million in the three months ended April 30, 2023 to $36.7 million in the three months ended April 30, 2024. This increase was primarily attributable to a $4.0 million increase in employee compensation and related expenses primarily due to increased investment in R&D headcount, a $1.2 million increase in stock-based compensation expense due to an increase in the grant date fair value of employee equity awards, and a $0.8 million increase in contractor costs, partially offset by a $1.1 million increase in the capitalization of software development costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) consist primarily of personnel costs and related expenses, professional fees, changes in the fair values of our obligations under contingent consideration arrangements, sales and marketing expenses, including travel costs, sales commissions and sales referral fees, facility costs, communication expenses, and other administrative expenses.
The following table sets forth SG&A for the three months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | % Change | |||||||||||||||||||
| (in thousands) | 2024 | 2023 | 2024-2023 | |||||||||||||||||
| Selling, general and administrative | $ | 93,276 | $ | 101,279 | (8)% | |||||||||||||||
Three Months Ended April 30, 2024 compared to Three Months Ended April 30, 2023. SG&A decreased approximately $8.0 million, or 8%, from $101.3 million in the three months ended April 30, 2023 to $93.3 million in the three months ended April 30, 2024. This decrease was primarily due to a $7.3 million decrease in professional services expense primarily due to reaching settlement in the prior year regarding certain legal matters discussed in Note 15, “Commitments and Contingencies” to our
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condensed consolidated financial statements included under Part I, Item 1 of this report, and a $2.7 million decrease in IT costs and asset impairment charges related to a cloud-based IT infrastructure realignment project that was substantially completed during the year ended January 31, 2024, partially offset by a $1.2 million increase in stock-based compensation expense due to an increase in the grant date fair value of employee equity awards, and a $0.7 million increase in the cost of third-party software components in order to support our hybrid work environment. SG&A was also impacted by a $0.6 million benefit due to a change in the fair value of our obligations under contingent consideration arrangements, from a net charge of $0.2 million in the three months ended April 30, 2023 to a net benefit of $0.4 million during the three months ended April 30, 2024, as a result of revised outlooks for achieving the performance targets under several unrelated contingent consideration arrangements.
Amortization of Other Acquired Intangible Assets
Amortization of other acquired intangible assets consists of the 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 the amortization of other acquired intangible assets for the three months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | % Change | |||||||||||||||||||
| (in thousands) | 2024 | 2023 | 2024-2023 | |||||||||||||||||
| Amortization of other acquired intangible assets | $ | 3,065 | $ | 6,330 | (52)% | |||||||||||||||
Three Months Ended April 30, 2024 compared to Three Months Ended April 30, 2023. Amortization of other acquired intangible assets decreased approximately $3.2 million, or 52%, from $6.3 million in the three months ended April 30, 2023 to $3.1 million in the three months ended April 30, 2024. The decrease was attributable to acquired customer-related intangible assets from historical business combinations becoming fully amortized, partially offset by amortization expense associated with acquired intangible assets from recent business combinations.
Further discussion regarding our business combinations appears in Note 5, “Business Combinations, Asset Acquisitions, and Divestitures” to our condensed consolidated financial statements included under Part I, Item 1 of this report.
Other Expense, Net
The following table sets forth total other expense, net for the three months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | % Change | |||||||||||||||||||
| (in thousands) | 2024 | 2023 | 2024-2023 | |||||||||||||||||
| Interest income | $ | 1,978 | $ | 1,982 | —% | |||||||||||||||
| Interest expense | (2,591) | (2,781) | (7)% | |||||||||||||||||
Other (expense) income: | ||||||||||||||||||||
Foreign currency (losses) gains, net | (537) | 237 | * | |||||||||||||||||
| Other, net | 39 | (213) | (118)% | |||||||||||||||||
Total other (expense) income, net | (498) | 24 | * | |||||||||||||||||
| Total other expense, net | $ | (1,111) | $ | (775) | 43% | |||||||||||||||
* Percentage is not meaningful.
Three Months Ended April 30, 2024 compared to Three Months Ended April 30, 2023. Total other expense, net, increased by $0.3 million from $0.8 million in the three months ended April 30, 2023 to $1.1 million in the three months ended April 30, 2024.
Interest expense decreased from $2.8 million in the three months ended April 30, 2023 to $2.6 million in the three months ended April 30, 2024 primarily due to $0.2 million of combined deferred debt issuance costs and unamortized discount associated with the Term Loan that were written off and were included within interest expense on our condensed consolidated
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statement of operations for the three months ended April 30, 2023. Further discussion regarding our borrowings appears in Note 7, “Long-term Debt” to our condensed consolidated financial statements included under Part I, Item 1 of this report.
We recorded $0.5 million of net foreign currency losses in the three months ended April 30, 2024, and $0.2 million of net foreign currency gains in the three months ended April 30, 2023. Our foreign currency loss in the current period was primarily due to the collection of a long-standing foreign withholding tax receivable.
Provision for Income Taxes
The following table sets forth our provision for income taxes for the three months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | % Change | |||||||||||||||||||
| (in thousands) | 2024 | 2023 | 2024-2023 | |||||||||||||||||
| Provision for income taxes | $ | 7,955 | $ | 4,363 | 82% | |||||||||||||||
Three Months Ended April 30, 2024 compared to Three Months Ended April 30, 2023. Our effective income tax rate was 34.1% for the three months ended April 30, 2024, compared to an effective income tax rate of 54.6% for the three months ended April 30, 2023.
For the three months ended April 30, 2024, the effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the U.S. taxation of certain foreign activities, offset by lower statutory rates in certain foreign jurisdictions. The result was an income tax provision of $8.0 million on pretax income of $23.3 million, which represented an effective income tax rate of 34.1%.
For the three months ended April 30, 2023, the effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the U.S. taxation of certain foreign activities, offset by lower statutory rates in certain foreign jurisdictions. The result was an income tax provision of $4.4 million on pretax income of $8.0 million, which represented an effective income tax rate of 54.6%.
The Organization for Economic Co-operation and Development (“OECD”) Pillar 2 guidelines address the increasing digitalization of the global economy, re-allocating taxing rights among countries. The European Union and many other member states have committed to adopting Pillar 2 which calls for a global minimum tax of 15% to be effective for tax years beginning in 2024. Certain jurisdictions in which we operate have enacted Pillar 2 legislation and others are considering changes to their tax laws to adopt the Pillar 2 global minimum tax. We are monitoring developments and evaluating the impacts these new rules will have on our tax rate, including eligibility to qualify for safe harbor rules. We do not currently anticipate that the rules will have a material impact on our income tax provision this year.
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.
On December 4, 2019, we announced that an affiliate (the “Apax Investor”) of Apax Partners (“Apax”) would make an investment in us in an amount of up to $400.0 million. Under the terms of the Investment Agreement, dated as of December 4, 2019 (the “Investment Agreement”), on May 7, 2020, the Apax Investor purchased $200.0 million of our Series A convertible preferred stock (“Series A Preferred Stock”) with an initial conversion price of $53.50 per share. In accordance with the Investment Agreement, the Series A Preferred Stock did not participate in the Spin-Off distribution of the Cognyte shares and the Series A Preferred Stock conversion price was instead adjusted to $36.38 per share based on the ratio of the relative trading prices of Verint and Cognyte following the Spin-Off. In connection with the completion of the Spin-Off, on April 6, 2021, the Apax Investor purchased $200.0 million of our Series B convertible preferred stock (“Series B Preferred Stock”). The Series B Preferred Stock is convertible at a conversion price of $50.25, based in part on our trading price over the 20 trading day period following the Spin-Off. As of April 30, 2024, Apax’s ownership in us on an as-converted basis was approximately 13.5%.
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Each series of Preferred Stock paid dividends at an annual rate of 5.2% until May 7, 2024, and thereafter pays at a rate of 4.0%, subject to adjustment under certain circumstances. Dividends will be cumulative and payable semiannually in arrears in cash. All dividends that are not paid in cash will remain accumulated dividends with respect to each share of Preferred Stock. We used the proceeds from the Apax investment to repay outstanding indebtedness, to fund a portion of our stock repurchase programs (as described below under “Liquidity and Capital Resources Requirements”), and/or for general corporate purposes. Please refer to Note 9, “Convertible Preferred Stock”, to our condensed consolidated financial statements included under Part I, Item 1 of this report for more information regarding the Apax convertible preferred stock investment.
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 cloud operations, marketing, facilities and overhead costs, and capital expenditures. We also utilize cash for debt service, stock repurchases, dividends on the Preferred Stock, and business acquisitions. Cash generated from operations, along with our existing cash, cash equivalents, and short-term investments, are our primary sources of operating liquidity.
We have historically expanded our business in part by investing in strategic growth initiatives, including acquisitions of products, technologies, and businesses. We may finance such acquisitions using cash, debt, stock, or a combination of the foregoing, however, we have used cash as consideration for substantially all of our historical business combinations and asset acquisitions, including approximately $9.2 million of net cash expended for business combinations and asset acquisitions during the three months ended April 30, 2024. During the three months ended April 30, 2024, we completed the acquisition of an AI-powered analytics company. This transaction was not material to our condensed consolidated financial statements. There were no business combinations or asset acquisitions during the three months ended April 30, 2023. Please refer to Note 5, “Business Combinations, Asset Acquisitions, and Divestitures”, to our condensed consolidated financial statements included under Part I, Item 1 of this report for more information regarding our recent business combinations and asset acquisitions.
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 capital through the issuance of additional equity or the incurrence of additional debt.
A portion of our operating income is earned outside the United States. Cash, cash equivalents, short-term investments, and restricted cash, restricted cash equivalents, and restricted bank time deposits (excluding any long-term portions) held by our subsidiaries outside of the United States were $177.7 million and $143.1 million as of April 30, 2024 and January 31, 2024, respectively, and are generally used to fund the subsidiaries’ operating requirements and to invest in growth initiatives, including business acquisitions. These subsidiaries also held long-term restricted cash and cash equivalents, and restricted bank time deposits of $0.2 million, at April 30, 2024 and January 31, 2024.
We currently intend to continue to indefinitely reinvest a portion of the earnings of our foreign subsidiaries, which, as a result of the 2017 Tax Cuts and Jobs Act, may now be repatriated without incurring additional U.S. federal income taxes.
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. As noted above, we currently intend to indefinitely reinvest a portion of the earnings of our foreign subsidiaries to finance foreign activities. Except to the extent that earnings of our foreign subsidiaries have been subject to U.S. taxation as of April 30, 2024, we have not provided tax on the outside basis difference of foreign subsidiaries nor have we provided for any additional withholding or other tax that may be applicable should a future distribution be made from any unremitted earnings of foreign subsidiaries. Due to complexities in the laws of the foreign jurisdictions and the assumptions that would have to be made, it is not practicable to estimate the total amount of income and withholding taxes that would have to be provided on such earnings.
The following table summarizes our total cash, cash equivalents, restricted cash, cash equivalents, and bank time deposits, and short-term investments, as well as our total debt, as of April 30, 2024 and January 31, 2024:
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| April 30, | January 31, | |||||||||||||
| (in thousands) | 2024 | 2024 | ||||||||||||
| Cash and cash equivalents | $ | 236,592 | $ | 241,400 | ||||||||||
| Restricted cash and cash equivalents, and restricted bank time deposits (excluding long term portions) | 1,074 | 1,269 | ||||||||||||
| Short-term investments | 785 | 686 | ||||||||||||
| Total cash, cash equivalents, restricted cash and cash equivalents, restricted bank time deposits, and short-term investments | $ | 238,451 | $ | 243,355 | ||||||||||
| Total debt, including current portions | $ | 411,365 | $ | 410,965 | ||||||||||
Capital Allocation Framework
As noted above, after cash utilization required for working capital, capital expenditures, required debt service, and dividends on the Preferred Stock, we expect that our primary usage of cash will be for business combinations, repayment of outstanding indebtedness, and/or stock repurchases under repurchase programs that may be in place from time to time (subject to the terms of our Credit Agreement). Please see the “Liquidity and Capital Resources Requirements” section below for further information about our recent stock repurchase program.
Condensed Consolidated Cash Flow Activity
The following table summarizes selected items from our condensed consolidated statements of cash flows for the three months ended April 30, 2024 and 2023:
| Three Months Ended April 30, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| Net cash provided by operating activities | $ | 60,717 | $ | 60,007 | ||||||||||
| Net cash used in investing activities | (14,135) | (10,758) | ||||||||||||
| Net cash used in financing activities | (50,737) | (71,486) | ||||||||||||
| Effect of foreign currency exchange rate changes on cash and cash equivalents | (848) | 859 | ||||||||||||
| Net decrease in cash, cash equivalents, restricted cash, and restricted cash equivalents | $ | (5,003) | $ | (21,378) | ||||||||||
Our financing activities used $50.7 million of net cash and our investing activities used $14.1 million of net cash during the three months ended April 30, 2024, which was partially offset by $60.7 million of cash generated from operating activities. Further discussion of these items appears below.
Net Cash Provided by Operating Activities
Net cash provided by operating activities is driven primarily by our net income or loss, as adjusted for non-cash items and working capital changes. Operating activities generated $60.7 million of net cash during the three months ended April 30, 2024, compared to $60.0 million generated during the three months ended April 30, 2023. Our operating cash flow in the current period increased primarily due to higher operating income, offset by the collection in the prior period of a $12.5 million insurance reimbursement related to certain legal matters that we agreed to settle.
Our cash flow from operating activities can fluctuate from period to period due to several factors, including the timing of our billings and collections, the timing and amounts of interest, income tax and other payments, and our operating results.
Net Cash Used in Investing Activities
During the three months ended April 30, 2024, our investing activities used $14.1 million of net cash, consisting primarily of $9.2 million of net cash utilized for business combinations and asset acquisitions, $6.1 million of payments for property, equipment and capitalized software development, and $0.1 million of net purchases of short-term investments, partially offset by $1.3 million of net proceeds from the divestiture of our manual quality managed services business during the three months ended January 31, 2024.
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During the three months ended April 30, 2023, our investing activities used $10.8 million of net cash, consisting primarily of $6.8 million of payments for property, equipment and capitalized software development costs, $2.9 million of net purchases of short-term investments, and a $1.1 million investment in a privately-held company.
We had no significant commitments for capital expenditures at April 30, 2024.
Net Cash Used in Financing Activities
For the three months ended April 30, 2024, our financing activities used $50.7 million of net cash, consisting primarily of $37.1 million of payments to repurchase common stock, $10.4 million of payments of Preferred Stock dividends, $2.7 million for the financing portion of payments under contingent consideration arrangements related to prior business combinations, $0.6 million of finance lease payments and other financing obligations, and a $0.2 million distribution to a noncontrolling shareholder of one of our subsidiaries, partially offset by $0.2 million of cash received related to the sale of an insignificant product line in March 2023.
For the three months ended April 30, 2023, our financing activities used $71.5 million of net cash, primarily due to $100.0 million of repayments of borrowing under our Term Loan, $60.3 million of payments to repurchase common stock, $10.4 million of payments of Preferred Stock dividends, $0.5 million of finance lease payments, and a $0.2 million distribution to a noncontrolling shareholder of one of our subsidiaries, partially offset by $100.0 million of proceeds from borrowings under our Revolving Credit Facility.
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, dividends on Preferred Stock, working capital needs, ordinary course capital expenditures, research and development spending, and other commitments for at least the next 12 months from the issuance of our condensed consolidated financial statements. Currently, we have no plans to pay any cash dividends on our common stock, which are subject to certain restrictions under our Credit Agreement.
Our liquidity could be negatively impacted by a decrease in demand for our products and services, including the impact of changes in customer buying behavior due to circumstances over which we have no control, including, but not limited to, the effects of general economic conditions or geopolitical developments. 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 or an increase in our borrowings under our credit facility.
Repurchases of Common Stock
On December 7, 2022, we announced that our board of directors had authorized a stock repurchase program for the period from December 12, 2022 until January 31, 2025, whereby we may repurchase shares of common stock in an amount not to exceed, in the aggregate, $200.0 million during the repurchase period.
During the year ended January 31, 2024, we repurchased approximately 4,124,000 shares of our common stock for a cost of $124.4 million, including an excise tax of $0.8 million under the current stock repurchase program, as well as approximately 1,000 shares to facilitate income tax withholding or payments. During the three months ended April 30, 2024, we repurchased approximately 1,233,000 shares of our common stock at a cost of $38.1 million, including excise tax of $0.3 million, under this program, as well as an insignificant number of shares to facilitate income tax withholding or payments. Our share repurchases in excess of issuances are subject to a 1% excise tax enacted by the IRA. The excise tax of $0.3 million was recognized as part of the cost basis of shares acquired in the condensed consolidated statements of stockholders' equity during the three months ended April 30, 2024. Subsequent to April 30, 2024 through May 30, 2024, we repurchased approximately 270,000 shares of our common stock for $8.5 million under this program. Repurchases were funded with available cash in the United States.
Financing Arrangements
2021 Notes
On April 9, 2021, we issued $315.0 million in aggregate principal amount of our 2021 Notes, unless earlier converted by the holders pursuant to their terms. The 2021 Notes are unsecured and pay interest in cash semiannually in arrears at a rate of 0.25% per annum.
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We used a portion of the net proceeds from the issuance of the 2021 Notes to pay the costs of the Capped Calls described below. We also used a portion of the net proceeds from the issuance of the 2021 Notes, together with the net proceeds from the April 6, 2021 issuance of $200.0 million of Series B Preferred Stock, to repay a portion of the outstanding indebtedness under our Credit Agreement described below, to terminate an interest rate swap agreement, and to repurchase shares of our common stock. The remainder is being used for working capital and other general corporate purposes.
The 2021 Notes are convertible into shares of our common stock at an initial conversion rate of 16.1092 shares per $1,000 principal amount of 2021 Notes, which represents an initial conversion price of approximately $62.08 per share, subject to adjustment upon the occurrence of certain events, and subject to customary anti-dilution adjustments. Prior to January 15, 2026, the 2021 Notes will be convertible only upon the occurrence of certain events and during certain periods, and will be convertible thereafter at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2021 Notes. Upon conversion of the 2021 Notes, holders will receive cash up to the aggregate principal amount, with any remainder to be settled with cash or common stock, or a combination thereof, at our election. As of April 30, 2024, the 2021 Notes were not convertible.
Based on the closing market price of our common stock on April 30, 2024, the if-converted value of the 2021 Notes was less than their aggregate principal amount.
Capped Calls
In connection with the issuance of the 2021 Notes, on April 6, 2021 and April 8, 2021, we entered into capped call transactions (the “Capped Calls”) with certain counterparties. The Capped Calls are intended generally to reduce the potential dilution to our common stock upon any conversion of the 2021 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2021 Notes, in the event that at the time of conversion our common stock price exceeds the conversion price, with such reduction and/or offset subject to a cap.
The Capped Calls exercise price is equal to the $62.08 initial conversion price of each of the 2021 Notes, and the cap price is $100.00, each subject to certain adjustments under the terms of the Capped Calls. The Capped Calls have the economic effect of increasing the conversion price of the 2021 Notes from $62.08 per share to $100.00 per share. Our exercise rights under the Capped Calls generally trigger upon conversion of the 2021 Notes, and the Capped Calls terminate upon maturity of the 2021 Notes, or the first day the 2021 Notes are no longer outstanding. As of April 30, 2024, no Capped Calls have been exercised.
Pursuant to their terms, the Capped Calls qualify for classification within stockholders’ equity, and their fair value is not remeasured and adjusted, as long as they continue to qualify for stockholders’ equity classification. We paid approximately $41.1 million for the Capped Calls, including applicable transaction costs, which was recorded as a reduction to additional paid-in capital.
Credit Agreement
On June 29, 2017, we entered into a credit agreement with certain lenders and terminated a prior credit agreement. The credit agreement was amended in 2018, 2020, 2021, and 2023, as further described below (as amended, the “Credit Agreement”).
The Credit Agreement currently provides for $725.0 million of senior secured credit facilities, comprised of a $425.0 million term loan that was scheduled to mature on June 29, 2024 (the “Term Loan”) prior to being repaid by us in full, and a $300.0 million revolving credit facility maturing on April 9, 2026 (the “Revolving Credit Facility”). The Revolving Credit Facility replaced our prior $300.0 million revolving credit facility (the “Prior Revolving Credit Facility”), and is subject to increase and reduction from time to time according to the terms of the Credit Agreement.
On April 27, 2023, we repaid the remaining $100.0 million outstanding principal balance on our Term Loan in full with proceeds from our Revolving Credit Facility, in addition to $0.5 million of accrued interest thereon. As a result, $0.2 million of deferred debt issuance costs associated with the Term Loan were written off and were included within interest expense on our condensed consolidated statement of operations for the three months ended April 30, 2023.
Interest rates on loans under the Credit Agreement are periodically reset, at our option, originally at either a Eurodollar Rate (which was derived from LIBOR) or an alternative base rate (“ABR”) (each as defined in the Credit Agreement), plus in each case a margin.
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On May 10, 2023, we entered into an amendment to the Credit Agreement (the “Fourth Amendment”) related to the phase-out of LIBOR by the UK Financial Conduct Authority. Effective July 1, 2023, borrowings under the Credit Agreement bear interest, at our option, at either: (i) the ABR, plus the applicable margin therefor or (ii) the adjusted Term Secured Overnight Financing Rate published by the CME Term SOFR Administrator (as more fully defined and set forth in the Credit Agreement, “Adjusted Term SOFR”), plus the applicable margin therefor. The applicable margin in each case is determined based on our Leverage Ratio (as defined below) and ranges from 0.25% to 1.25% for borrowings bearing interest at the ABR and from 1.25% to 2.25% for borrowings bearing interest based on Adjusted Term SOFR.
Borrowings under the Revolving Credit Facility were $100.0 million at April 30, 2024, which is included in long-term debt on our condensed consolidated balance sheet. For borrowings under the Revolving Credit Facility, the applicable margin is determined by reference to our Consolidated Total Debt to Consolidated EBITDA (each as defined in the Credit Agreement) leverage ratio (the “Leverage Ratio”). As of April 30, 2024, the interest rate on our Revolving Credit Facility borrowings was 6.93%. In addition, we are required to pay a commitment fee with respect to unused availability under the Revolving Credit Facility at rates per annum determined by reference to our Leverage Ratio. The proceeds of borrowings under the Revolving Credit Facility were used to repay the outstanding balance of the Term Loan.
The Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this type. The Credit Agreement also contains a financial covenant that, solely with respect to the Revolving Credit Facility, requires us to maintain a Leverage Ratio of no greater than 4.5 to 1. At April 30, 2024, our Leverage Ratio was approximately 1.1 to 1. The limitations imposed by the covenants are subject to certain exceptions as detailed in the Credit Agreement.
Our obligations under the Credit Agreement are guaranteed by each of our direct and indirect existing and future material domestic wholly owned restricted subsidiaries and are secured by a security interest in substantially all of our assets and the assets of the guarantor subsidiaries, subject to certain exceptions.
The Credit Agreement provides for events of default with corresponding grace periods that we believe are customary for credit facilities of this type. Upon an event of default, all of our obligations owed under the Credit Agreement may be declared immediately due and payable, and the lenders’ commitments to make loans under the Credit Agreement may be terminated.
Contractual Obligations
Our principal commitments primarily consist of long-term debt, dividends on Preferred Stock, leases for office space and open non-cancellable purchase orders. As of April 30, 2024, we believe there have been no material changes to our contractual obligations from those disclosed in Part II, Item 7. — Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended January 31, 2024. For additional information regarding our leases, long-term debt and our commitments and contingencies, see Note 15, “Leases”, in the Form 10-K and Note 7, “Long-Term Debt”, Note 9, “Convertible Preferred Stock”, and Note 15, “Commitments and Contingencies” in the notes to our condensed consolidated financial statements included in Part I, Item 1 of this report.
As of April 30, 2024, our total operating lease liabilities were $36.1 million, of which $5.2 million is included within accrued expenses and other current liabilities (current portions), and $30.9 million is included as operating lease liabilities (long-term portions), on our condensed consolidated balance sheets.
It is not our business practice to enter into off-balance sheet arrangements. However, in the normal course of business, we enter into contracts in which we make representations and warranties that guarantee the performance of our products and services. Historically, there have been no significant losses related to such guarantees.
Our condensed consolidated balance sheet at April 30, 2024 included $72.6 million of non-current tax reserves (including interest and penalties of $7.2 million), net of related benefits for uncertain tax positions. 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 and Asset Acquisitions
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 the achievement of performance targets following the acquisition dates.
For the three months ended April 30, 2024, we made $3.3 million of payments under contingent consideration arrangements. As of April 30, 2024, potential future cash payments, and earned consideration expected to be paid, subsequent to April 30, 2024 under contingent consideration arrangements totaled $22.5 million, the estimated fair value of which was $6.9 million, of which
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$2.1 million was recorded within accrued expenses and other current liabilities, and $4.8 million was recorded within other liabilities. The performance periods associated with these potential payments extend through January 2027.
In July 2023, we entered into an agreement to acquire source code that qualifies as an asset acquisition and provides for additional consideration contingent upon achieving certain performance targets for the years ending January 31, 2025 and 2026 of up to $5.0 million, plus the opportunity to receive additional payments from us based on any revenue we receive from sales of products based on the acquired technology in adjacent markets. Refer to Note 5, “Business Combinations, Asset Acquisitions, and Divestitures” to our condensed consolidated financial statements included under Part I, Item 1 of this report for further details.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, and the potential impact of these pronouncements on our condensed consolidated financial statements, see Note 1, “Basis of Presentation and Significant Accounting Policies” to the condensed consolidated financial statements in Part I, Item 1 of this report.
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Item 3. 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 use derivative instruments 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 April 2021, we issued $315.0 million in aggregate principal amount of the 2021 Notes. Prior to January 15, 2026, the 2021 Notes will be convertible only upon the occurrence of certain events and during certain periods, and will be convertible thereafter at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2021 Notes. Upon conversion of the 2021 Notes, holders will receive cash up to the aggregate principal amount, with any remainder to be settled with cash or common stock, or a combination thereof, at our election. Concurrent with the issuance of the 2021 Notes, we entered into capped call transactions with certain counterparties. These separate transactions were completed to reduce our exposure to potential dilution upon conversion of the 2021 Notes.
The 2021 Notes have a fixed annual interest rate of 0.25% and therefore do not have interest rate risk exposure. However, the fair values of the 2021 Notes are subject to interest rate risk, market risk, and other factors due to the convertible feature. The fair values of the 2021 Notes are also affected by our common stock price. Generally, the fair values of the 2021 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 2021 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 2021 Notes at fair value on our condensed consolidated balance sheet, but we report the fair value of the 2021 Notes for disclosure purposes.
Interest rates on loans under the Credit Agreement are periodically reset, at our option, originally at either a Eurodollar Rate or an ABR, plus, in each case, a margin. On May 10, 2023, we entered into the Fourth Amendment to the Credit Agreement related to the phase-out of LIBOR by the UK Financial Conduct Authority. Effective July 1, 2023, borrowings under the Credit Agreement bear interest, at our option, at either: (i) the ABR, plus the applicable rate margin therefor or (ii) Adjusted Term SOFR, plus the applicable margin therefor. The applicable margin in each case is determined based on our leverage ratio (described above) and ranges from 0.25% to 1.25% for borrowings bearing interest at the ABR and from 1.25% to 2.25% for borrowings bearing interest based on Adjusted Term SOFR.
On April 27, 2023, we repaid in full the remaining $100.0 million outstanding principal balance related to our Term Loan with $100.0 million of proceeds from borrowings under our Revolving Credit Facility. For loans under the Revolving Credit Facility, the margin is determined by reference to our Consolidated Total Debt to Consolidated EBITDA leverage ratio. As of April 30, 2024, the interest rate on our $100.0 million of borrowings under our Revolving Credit Facility was 6.93%. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements.
Inflation Risk
While we continue to see significant demand for our solutions as our customers accelerate the digitization of their customer interactions and internal operations, we believe that current macroeconomic factors, including the impact of inflation, are impacting customer and partner spending decisions. Given the current macroeconomic environment, we continue to look for ways to manage costs and mitigate any changes in our customers’ purchasing behavior that may occur due to significant inflationary pressure or other factors. If our costs, in particular labor, sales and marketing, and cloud hosting costs, become subject to sustained or increased inflationary pressure, we may be unable to fully offset such higher costs through price increases, which could harm our business, financial condition, and results of operations.
The section entitled “Quantitative and Qualitative Disclosures About Market Risk” under Part II, Item 7A of our Annual Report on Form 10-K for the year ended January 31, 2024 provides detailed quantitative and qualitative discussions of the market risks affecting our operations. Our exposure to market risk has not changed materially during the three months ended April 30, 2024, other than as described above.
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Item 4. 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 April 30, 2024. 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 April 30, 2024.
Changes in Internal Control Over Financial Reporting
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 three months ended April 30, 2024, 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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Part II
Item 1. Legal Proceedings
See Note 15, “Commitments and Contingencies” to our condensed consolidated financial statements under Part I, Item 1 of this report for information regarding our legal proceedings.
Item 1A. Risk Factors
There have been no material changes to the Risk Factors described in Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended January 31, 2024. In addition to the other information set forth in this Quarterly Report, you should carefully consider the risks discussed in our Annual Report on Form 10-K, which could materially affect our business, financial condition, or operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing us, however. Additional risks and uncertainties not currently known to us or that we currently deem to be insignificant also may materially and adversely affect our business, financial condition, or operating results in the future.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On December 7, 2022, we announced that our board of directors had authorized a stock repurchase program for the period from December 12, 2022 until January 31, 2025, whereby we may repurchase shares of common stock in an amount not to exceed, in the aggregate, $200.0 million during the repurchase period. During the year ended January 31, 2024, we repurchased approximately 4,124,000 shares under this stock repurchase program for an aggregate purchase price of $123.6 million, excluding an excise tax of $0.8 million. During the three months ended April 30, 2024, we repurchased approximately 1,233,000 shares under this stock repurchase program for $37.9 million, excluding excise tax of $0.3 million. Subsequent to April 30, 2024 through May 30, 2024, we repurchased approximately 270,000 shares of our common stock for $8.5 million under this program. Repurchases were financed with available cash in the United States.
From time to time, we have purchased shares of our common stock from our directors, officers, and other employees to facilitate income tax withholding or payments upon vesting of equity awards during Company-imposed trading blackout or lockup periods.
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act (the "IRA") into law. The IRA imposes a 1% excise tax on share repurchases in excess of issuances, which is effective for us for repurchases completed after December 31, 2022. We reflect the excise tax within equity as part of the repurchase of the common stock.
Share repurchase activity during the three months ended April 30, 2024 was as follows:
| Period | Total Number Shares Purchased | Average Price Paid per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) | ||||||||||||||||||||||
February 1, 2024 - February 29, 2024 | 250,416 | $ | 31.00 | 250,000 | $ | 45,244 | ||||||||||||||||||||
March 1, 2024 - March 31, 2024 | 250,000 | 31.18 | 250,000 | 37,449 | ||||||||||||||||||||||
April 1, 2024 - April 30, 2024 | 733,380 | 30.39 | 733,380 | 15,164 | ||||||||||||||||||||||
| 1,233,796 | $ | 30.67 | 1,233,380 | $ | 15,164 | |||||||||||||||||||||
(1) Represents the approximate weighted-average price paid per share and excludes excise tax.
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The average price per share and aggregate cost amounts disclosed above do not include the cost of commissions or the excise tax.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During the three months ended April 30, 2024, no director or officer of the Company adopted terminated
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Item 6. Exhibits
The following exhibit list includes agreements that we entered into or that became effective during the three months ended April 30, 2024:
| Number | Description | Filed Herewith / Incorporated by Reference from | ||||||||||||
| 101.INS | XBRL Instance Document | Filed herewith | ||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | Filed herewith | ||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | ||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | ||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | ||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | 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.
* Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 6 of this report.
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Signature
Pursuant to the requirements 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.
| Verint Systems Inc. | |||||
| June 4, 2024 | /s/ Grant Highlander | ||||
| Grant Highlander | |||||
| Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |||||
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