Verint(VRNT) - 2023 Q2 - Quarterly Report

Cautionary Note on Forward-Looking Statements This section highlights that forward-looking statements are subject to various known and unknown risks, uncertainties, and assumptions that may cause actual results to differ materially Forward-Looking Statements Risks This section details various known and unknown risks, including macroeconomic conditions, technological changes, and regulatory environments, that could materially impact future results - Forward-looking statements are subject to known and unknown risks, uncertainties, and assumptions that could cause actual results to differ materially[11] - Key risks include macroeconomic and global conditions (slowdowns, inflation, conflicts like the Russian invasion of Ukraine, COVID-19 pandemic), customer delays/cancellations, ability to keep pace with technological advances, aggressive competition, challenges with cloud transition, talent retention, significant international operations, complex and changing regulatory environments (data privacy, tax), cybersecurity vulnerabilities, intellectual property protection, significant leverage from debt, and liquidity issues[12][14] - Risks associated with the 2021 spin-off of the former Cyber Intelligence Solutions business (Cognyte) include the possibility that the transaction does not achieve anticipated benefits, does not qualify as a tax-free transaction, or exposes the company to unexpected claims or liabilities[15] Part I. Financial Information This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition Item 1. Financial Statements (Unaudited) This section provides the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, equity, and cash flows - The financial statements are unaudited and prepared in accordance with GAAP, reflecting all normal recurring adjustments necessary for fair presentation[43][44] - Certain information and disclosures normally included in annual consolidated financial statements have been omitted per SEC rules, and interim results are not necessarily indicative of full-year results[44] Condensed Consolidated Balance Sheets This section presents the condensed consolidated balance sheets, detailing assets, liabilities, and equity as of July 31, 2022, and January 31, 2022 | Metric | July 31, 2022 ($) | January 31, 2022 ($) | | :----------------------------------- | :------------ | :--------------- | | Total Assets | $2,167,290 | $2,361,105 | | Cash and cash equivalents | $256,502 | $358,805 | | Accounts receivable, net | $148,472 | $193,831 | | Goodwill | $1,315,109 | $1,353,421 | | Total Liabilities | $892,614 | $970,205 | | Total current liabilities | $400,493 | $479,466 | | Long-term debt | $407,816 | $406,954 | | Total temporary equity | $436,321 | $436,321 | | Total stockholders' equity | $838,355 | $954,579 | - Total assets decreased by $193.8 million from January 31, 2022, to July 31, 2022, primarily due to a $102.3 million decrease in cash and cash equivalents and a $45.4 million decrease in accounts receivable[20] - Total liabilities decreased by $77.6 million, mainly due to a $79.0 million reduction in current liabilities, while long-term debt remained relatively stable[20] - Total stockholders' equity decreased by $116.2 million, largely influenced by a decrease in additional paid-in capital and an increase in accumulated other comprehensive loss[20] Condensed Consolidated Statements of Operations This section outlines the condensed consolidated statements of operations, including revenue, gross profit, operating income, and net loss for the reported periods | Metric | 3 Months Ended July 31, 2022 ($) | 3 Months Ended July 31, 2021 ($) | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total revenue | $222,899 | $214,617 | $440,805 | $415,521 | | Gross profit | $147,794 | $142,050 | $288,965 | $270,614 | | Operating income | $1,510 | $11,537 | $2,008 | $15,979 | | Net (loss) income | $(2,236) | $5,316 | $(1,662) | $6,410 | | Net (loss) income attributable to Verint Systems Inc. | $(2,412) | $5,000 | $(2,126) | $5,799 | | Net loss attributable to Verint Systems Inc. common shares | $(7,612) | $(200) | $(12,526) | $(2,723) | | Basic Net loss per common share | $(0.12) | $0.00 | $(0.19) | $(0.04) | | Diluted Net loss per common share | $(0.12) | $0.00 | $(0.19) | $(0.04) | - Total revenue increased by 4% for the three months and 6% for the six months ended July 31, 2022, compared to the prior year periods[22] - Operating income significantly decreased by 87% for both the three and six months ended July 31, 2022, primarily due to increased operating expenses[22][271][274] - The company reported a net loss attributable to common shares of $7.6 million for the three months and $12.5 million for the six months ended July 31, 2022, a substantial increase in loss compared to the prior year[22] Condensed Consolidated Statements of Comprehensive (Loss) Income This section presents the condensed consolidated statements of comprehensive (loss) income, detailing net loss and other comprehensive loss components | Metric | 3 Months Ended July 31, 2022 ($) | 3 Months Ended July 31, 2021 ($) | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :--------------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net (loss) income | $(2,236) | $5,316 | $(1,662) | $6,410 | | Other comprehensive (loss) income | $(13,747) | $1,663 | $(43,792) | $34,370 | | Comprehensive (loss) income | $(15,983) | $6,979 | $(45,454) | $40,780 | | Comprehensive (loss) income attributable to Verint Systems Inc. | $(16,159) | $6,663 | $(45,918) | $40,169 | - Other comprehensive loss significantly increased for the six months ended July 31, 2022, primarily due to foreign currency translation adjustments, reflecting the strengthening of the U.S. dollar[24][169] Condensed Consolidated Statements of Stockholders' Equity This section details changes in stockholders' equity, including net loss, other comprehensive loss, stock-based compensation, and treasury stock transactions - Total Verint Systems Inc. stockholders' equity decreased from $952.2 million at January 31, 2022, to $836.0 million at July 31, 2022[27] - Key changes for the three months ended July 31, 2022, include a net loss of $2.4 million, other comprehensive loss of $13.7 million, stock-based compensation of $23.4 million, and treasury stock acquisitions of $105.7 million[27] - Preferred stock dividends of $10.4 million were paid for the six months ended July 31, 2022[27] Condensed Consolidated Statements of Cash Flows This section presents the condensed consolidated statements of cash flows, categorizing cash activities into operating, investing, and financing for the reported periods | Metric | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :-------------------------------------------------------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by operating activities from continuing operations | $46,680 | $26,853 | | Net cash (used in) provided by investing activities | $(13,954) | $27,390 | | Net cash used in financing activities | $(132,437) | $(421,912) | | Net decrease in cash, cash equivalents, restricted cash, and restricted cash equivalents | $(102,286) | $(379,623) | - Net cash provided by operating activities significantly increased to $46.7 million in the six months ended July 31, 2022, from $14.6 million in the prior year, driven by lower interest and income tax payments and favorable working capital changes[345] - Investing activities shifted from providing $27.4 million in cash in 2021 to using $14.0 million in 2022, primarily due to fewer maturities/sales of investments and ongoing capital expenditures[347][348] - Net cash used in financing activities decreased substantially from $421.9 million in 2021 to $132.4 million in 2022, largely due to the absence of large debt settlements and spin-off related cash transfers that occurred in the prior year[350][351] Notes to Condensed Consolidated Financial Statements This section provides detailed notes explaining the basis of presentation, significant accounting policies, and specific financial statement line items Note 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES This note describes the basis of financial statement presentation, the company's business, the Cognyte spin-off, and significant accounting policies - Verint helps brands provide Boundless Customer Engagement™ through its AI-powered Customer Engagement Cloud Platform, serving approximately 10,000 organizations in over 175 countries across diverse verticals[37][38] - The spin-off of Cognyte Software Ltd. was completed on February 1, 2021, after which Verint no longer consolidates Cognyte's financial results[40] - Apax Partners invested $400.0 million in Verint through Series A and Series B convertible preferred stock, with Apax's ownership at approximately 12.7% on an as-converted basis as of July 31, 2022[42][167] - The company adopted ASU No. 2021-04 as of February 1, 2022, with no material impact, and is currently assessing the impact of ASU No. 2020-04 (Reference Rate Reform) and ASU No. 2021-08 (Business Combinations) on its financial statements[54][55][56] - During the three months ended July 31, 2022, Verint commenced plans to sell an office building with a carrying value of approximately $1.1 million, classifying it as held for sale[51] Note 2. REVENUE RECOGNITION This note details the company's revenue recognition policies, disaggregating revenue by type and discussing remaining performance obligations - Revenue is primarily derived from providing customers the right to access cloud-based solutions, use software, and related services and support[57] | Revenue Type | 3 Months Ended July 31, 2022 ($) | 3 Months Ended July 31, 2021 ($) | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Recurring revenue | $166,440 | $156,178 | $325,807 | $300,631 | | - Bundled SaaS revenue | $54,679 | $42,940 | $103,964 | $82,249 | | - Unbundled SaaS revenue | $47,875 | $33,444 | $93,320 | $57,727 | | - Total cloud revenue | $118,332 | $93,256 | $228,975 | $173,306 | | - Support revenue | $48,108 | $62,922 | $96,832 | $127,325 | | Nonrecurring revenue | $56,459 | $58,439 | $114,998 | $114,890 | | - Perpetual revenue | $30,790 | $32,349 | $64,048 | $61,672 | | - Professional services revenue | $25,669 | $26,090 | $50,950 | $53,218 | | Total revenue | $222,899 | $214,617 | $440,805 | $415,521 | - Recurring revenue increased by 7% (3 months) and 8% (6 months) YoY, driven by strong growth in bundled SaaS (+27% and +26%) and unbundled SaaS (+43% and +62%), while support revenue decreased due to cloud migration[282][283] - Remaining Performance Obligations (RPO) totaled $696.4 million as of July 31, 2022, with $418.2 million expected to be recognized within one year[69] Note 3. NET LOSS PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC. This note provides the calculation of basic and diluted net loss per common share, explaining the anti-dilutive effects of potential common shares | Metric | 3 Months Ended July 31, 2022 ($) | 3 Months Ended July 31, 2021 ($) | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :--------------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net loss attributable to Verint Systems Inc. common shares | $(7,612) | $(200) | $(12,526) | $(2,723) | | Basic Net loss per common share | $(0.12) | $0.00 | $(0.19) | $(0.04) | | Diluted Net loss per common share | $(0.12) | $0.00 | $(0.19) | $(0.04) | | Weighted-average common shares outstanding (Basic) | 64,958 | 65,194 | 64,948 | 65,417 | - Basic and diluted net loss per common share were identical for all periods presented because the effect of all potential common shares (stock options, restricted stock, convertible notes, warrants, preferred stock) was anti-dilutive[71] - The 2021 Notes were not convertible as of July 31, 2022, and their if-converted value was less than their aggregate principal amount[72][107] Note 4. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS This note details the composition and changes in cash, cash equivalents, and short-term investments | Metric | July 31, 2022 ($) | January 31, 2022 ($) | | :-------------------------- | :------------ | :--------------- | | Cash and cash equivalents | $256,502 | $358,805 | | Short-term investments | $718 | $765 | | Total | $257,220 | $359,570 | - Cash and cash equivalents decreased by $102.3 million from January 31, 2022, to July 31, 2022[79] - Proceeds from maturities and sales of short-term investments were $0.3 million for the six months ended July 31, 2022, significantly lower than $45.6 million in the prior year[80] Note 5. BUSINESS COMBINATIONS This note provides information on business combinations, including the acquisition of Conversocial Limited and contingent consideration obligations - No business combinations were completed during the six months ended July 31, 2022[81] - In August 2021, Verint acquired Conversocial Limited for a total purchase price of $53.2 million, recognizing $31.3 million in goodwill and $19.9 million in identifiable intangible assets (customer relationships, developed technology, trademarks)[84][92] - Transaction and related costs for Conversocial were expensed as incurred, totaling $1.0 million for the six months ended July 31, 2022[88] - Contingent consideration obligations from prior business combinations were fully paid as of July 31, 2022, with payments of $7.5 million for the six months ended July 31, 2022[94][95] Note 6. INTANGIBLE ASSETS AND GOODWILL This note details the carrying amounts and changes in intangible assets and goodwill, including amortization and foreign currency translation impacts | Asset Type | July 31, 2022 (Net, $) | January 31, 2022 (Net, $) | | :-------------------------- | :-------------------- | :--------------------- | | Customer relationships | $75,794 | $91,581 | | Acquired technology | $17,154 | $25,606 | | Trade names | $422 | $1,067 | | Distribution network | $0 | $0 | | Total intangible assets | $93,370 | $118,254 | - Total net intangible assets decreased by $24.9 million from January 31, 2022, to July 31, 2022, primarily due to amortization and foreign currency translation[97] - Amortization expense for acquisition-related intangible assets was $20.7 million for the six months ended July 31, 2022, down from $23.5 million in the prior year[97] | Metric | Amount ($) | | :------------------------------------------------ | :------- | | Goodwill, net, at January 31, 2022 | $1,353,421 | | Foreign currency translation | $(38,046) | | Business combinations, including adjustments | $(266) | | Goodwill, net, at July 31, 2022 | $1,315,109 | - Goodwill, net, decreased by $38.3 million, primarily due to foreign currency translation adjustments. No goodwill impairment events were identified[99][101] Note 7. LONG-TERM DEBT This note describes the company's long-term debt, including convertible senior notes, term loans, and related interest expenses and derivative instruments | Debt Type | July 31, 2022 ($) | January 31, 2022 ($) | | :----------------------------------- | :------------ | :--------------- | | 2021 Notes | $315,000 | $315,000 | | Term Loan | $100,000 | $100,000 | | Less: unamortized debt discounts and issuance costs | $(7,184) | $(8,046) | | Total long-term debt | $407,816 | $406,954 | - The 2021 Notes (0.25% convertible senior notes due April 2026) have an initial conversion price of $62.08 per share and were not convertible as of July 31, 2022[103][105] - The Term Loan under the Credit Agreement had an outstanding balance of $100.0 million at July 31, 2022, with an interest rate of 3.80% (effective 4.00%)[120][126] - Capped Calls were entered into to reduce potential dilution from the 2021 Notes, with an exercise price of $62.08 and a cap price of $100.00[111][112] - The 2014 Notes matured on June 1, 2021, and were settled for $389.8 million in cash, with an additional 1.25 million common shares issued for the conversion premium. Note Hedges and Warrants related to the 2014 Notes have expired or been settled[110][117] | Metric | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :--------------------------------------- | :--------------------------- | :--------------------------- | | Total Interest Expense - 2021 Notes | $1,271 | $787 | | Total Interest Expense - 2014 Notes | $0 | $2,455 | | Total Interest Expense - Borrowings under Credit Agreement | $1,810 | $3,814 | | Total Interest Expense | $3,081 | $7,056 | Note 8. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION This note provides supplemental financial information, including inventories, other income/expense details, and cash payments for interest and income taxes | Metric | July 31, 2022 ($) | January 31, 2022 ($) | | :---------------- | :------------ | :--------------- | | Raw materials | $2,942 | $3,001 | | Work-in-process | $115 | $150 | | Finished goods | $3,500 | $2,186 | | Total inventories | $6,557 | $5,337 | | Metric | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :--------------------------------------- | :--------------------------- | :--------------------------- | | Foreign currency gains (losses), net | $2,260 | $(1,004) | | Losses on derivative financial instruments, net | $0 | $(14,374) | | Change in fair value of future tranche right | $0 | $15,810 | | Other, net | $(119) | $3,774 | | Total other income, net | $2,141 | $4,206 | - Cash paid for interest decreased from $8.2 million in H1 2021 to $1.7 million in H1 2022, and cash payments of income taxes, net, decreased from $30.2 million to $5.4 million[141] Note 9. CONVERTIBLE PREFERRED STOCK This note details the convertible preferred stock, including Apax Partners' investment, dividend rates, conversion prices, and classification as temporary equity - Apax Investor purchased $200.0 million of Series A Preferred Stock (May 2020) and $200.0 million of Series B Preferred Stock (April 2021), totaling $400.0 million[143] - Preferred Stock pays cumulative semi-annual cash dividends at an annual rate of 5.2% (decreasing to 4.0% after 48 months from Series A closing)[146] - Preferred stock dividends paid were $10.4 million for the three months and $20.8 million for the six months ended July 31, 2022[147] - Series A conversion price was adjusted to $36.38 per share post-Spin-Off, and Series B conversion price is $50.25 per share[148] - The Preferred Stock is classified as temporary equity due to potential redemption rights not solely under the company's control, though mandatory conversion is considered more likely than holder redemption[153][154] - The Future Tranche Right, related to the Series B Preferred Stock, was settled in April 2021, resulting in a $15.8 million non-cash benefit from fair value change for the six months ended July 31, 2021[157] Note 10. STOCKHOLDERS' EQUITY This note outlines changes in stockholders' equity, including common stock repurchases, accumulated other comprehensive loss, and foreign currency translation adjustments - No cash dividends were declared or paid on common stock during the six months ended July 31, 2022 and 2021[158] - Verint repurchased 2,000,000 shares of common stock at a cost of $105.7 million during the six months ended July 31, 2022, under a program authorized to offset dilution from equity compensation[162][164] - Accumulated other comprehensive loss increased from $(118.5) million at January 31, 2022, to $(162.3) million at July 31, 2022, primarily due to foreign currency translation adjustments[169] - Net losses recognized in Accumulated Other Comprehensive Loss (AOCL) from foreign currency forward contracts were $(460) thousand for the six months ended July 31, 2022[210] Note 11. INCOME TAXES This note provides information on income taxes, including the provision for income taxes, effective tax rates, and unrecognized income tax benefits | Metric | 3 Months Ended July 31, 2022 ($) | 3 Months Ended July 31, 2021 ($) | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Income before provision for income taxes | $612 | $9,517 | $1,482 | $10,539 | | Provision for income taxes | $2,848 | $4,201 | $3,144 | $4,129 | | Effective income tax rate | 465.4% | 44.1% | 212.1% | 39.2% | - The effective tax rate for the three and six months ended July 31, 2022, was significantly higher than the U.S. federal statutory rate of 21%, primarily due to a $2.1 million discrete income tax provision for a valuation allowance against a deferred tax asset related to an asset held for sale in a foreign jurisdiction and U.S. taxation of certain foreign activities[173][175] - Unrecognized income tax benefits were $84.0 million as of July 31, 2022, with a possible decrease of approximately $0.4 million in the next twelve months due to settlement of certain tax audits or lapses of statutes of limitation[178] Note 12. FAIR VALUE MEASUREMENTS This note details fair value measurements for financial instruments and other assets, categorized by valuation input levels | Metric | July 31, 2022 (Level 1, $) | July 31, 2022 (Level 2, $) | July 31, 2022 (Level 3, $) | January 31, 2022 (Level 1, $) | January 31, 2022 (Level 2, $) | January 31, 2022 (Level 3, $) | | :--------------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Money market funds | $43,369 | $0 | $0 | $127,041 | $0 | $0 | | Commercial paper | $0 | $69,691 | $0 | $0 | $29,995 | $0 | | Foreign currency forward contracts (assets) | $0 | $16 | $0 | $0 | $33 | $0 | | Contingent consideration receivable | $0 | $0 | $138 | $0 | $0 | $271 | | Foreign currency forward contracts (liabilities) | $0 | $219 | $0 | $0 | $91 | $0 | | Contingent consideration — business combinations (liabilities) | $0 | $0 | $0 | $0 | $7,776 | $0 | - An impairment loss of $1.8 million was recorded for an office building classified as held for sale, adjusting its carrying amount to fair value less costs to sell[197] - The estimated fair value of the 2021 Notes was approximately $300 million at July 31, 2022 (Level 2), and the Term Loan borrowings were approximately $98 million (Level 3)[193][194] Note 13. DERIVATIVE FINANCIAL INSTRUMENTS This note describes the company's use of derivative financial instruments, primarily foreign currency forward contracts, to manage market risks - Verint uses foreign currency forward contracts to manage short-term exposures to fluctuations in operational cash flows, primarily for compensation and customer collections in non-U.S. dollar currencies[202] - The 2018 Interest Rate Swap, previously a cash flow hedge, was terminated on April 13, 2021, for $16.5 million, resulting in a reclassification of $15.7 million of pretax accumulated deferred losses to other income (expense), net[207] - Net losses recognized in Accumulated Other Comprehensive Loss (AOCL) from foreign currency forward contracts were $(460) thousand for the six months ended July 31, 2022[210] Note 14. STOCK-BASED COMPENSATION This note details stock-based compensation plans, including expense recognition, types of awards, and unrecognized compensation expense - The 2019 Long-Term Stock Incentive Plan authorizes equity-based compensation, with an adjusted capacity of 14,239,656 shares post-Spin-Off[216][217] | Metric | 3 Months Ended July 31, 2022 ($) | 3 Months Ended July 31, 2021 ($) | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total stock-based compensation expense | $25,694 | $18,093 | $44,063 | $34,494 | | - Restricted stock units and restricted stock awards | $23,362 | $15,984 | $39,373 | $30,237 | | - Stock bonus program and bonus share program | $2,328 | $2,100 | $4,680 | $4,252 | - Total stock-based compensation expense increased by 42% for the three months and 28% for the six months ended July 31, 2022, primarily due to an increase in restricted stock units and restricted stock awards[218] - As of July 31, 2022, there was approximately $107.1 million of total unrecognized compensation expense, net of estimated forfeitures, related to unvested restricted stock units, expected to be recognized over a weighted-average period of 1.9 years[227] Note 15. COMMITMENTS AND CONTINGENCIES This note outlines the company's commitments and contingencies, including legal proceedings and contingent consideration payments for business combinations - In the CTI Litigation, a settlement agreement was reached on July 10, 2022, where Mavenir Inc. agreed to pay $16.0 million to plaintiffs, with Verint guaranteeing the payment. A corresponding indemnification receivable was recorded[240] - Verint is involved in unfair competition litigation in Michigan and Delaware, with claims of trademark infringement, unfair competition, and false advertising against its subsidiary ForeSee. Verint believes the claims are without merit and has filed counterclaims for breach of agreement and fraud[244][248] - No amounts have been recognized in financial statements for the unfair competition litigation as it is not probable a loss has been incurred, but potential exposure is considered reasonably possible[250] - Contingent consideration payments for business combinations totaled $7.5 million for the six months ended July 31, 2022, with no additional payments expected as performance periods for these arrangements expired[390] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial condition, operating results, and cash flows, including business overview and macroeconomic impacts Overview This overview discusses the Cognyte spin-off, Apax Partners' investment, macroeconomic conditions, the Russia-Ukraine conflict, and key market trends - Verint completed the spin-off of Cognyte Software Ltd. on February 1, 2021, and no longer consolidates its financial results[254] - Apax Partners made a $400.0 million investment in Verint through convertible preferred stock[256] - The COVID-19 pandemic continues to create significant uncertainty in macroeconomic conditions, including supply chain disruptions and labor shortages, leading to adjustments in employee work arrangements and real estate footprint[257][258] - The Russia-Ukraine conflict is not believed to have a material impact on the business and results of operation currently, but potential worsening could lead to greater global economic disruptions[259] - Verint's business focuses on helping brands provide Boundless Customer Engagement™ through its AI-powered Customer Engagement Cloud Platform, serving approximately 10,000 organizations globally[260][261] - Key market trends benefiting Verint include the acceleration of digital transformation, changes in the workforce shaping the future of work, and elevated customer expectations[263][264][265] Critical Accounting Policies and Estimates This section confirms no significant changes to critical accounting policies and estimates, highlighting areas requiring significant judgment - There were no significant changes to the company's critical accounting policies and estimates during the six months ended July 31, 2022[267] - Key accounting policies involve significant estimates and judgments in areas such as revenue recognition, accounting for business combinations, goodwill and other acquired intangible assets, income taxes, and accounting for stock-based compensation[267] Results of Operations This section provides a detailed analysis of the company's operating results, including revenue, expenses, and net loss, considering seasonality and foreign currency impacts Seasonality and Cyclicality This section explains the seasonal and cyclical factors influencing revenue and operating income, typically peaking in the fourth quarter - The business is subject to seasonal and cyclical factors, with revenue and operating income typically highest in the fourth quarter and lowest in the first quarter, reflecting customer spending patterns and budget cycles[268] - This pattern should not be considered a reliable indicator of future revenue or financial performance, as many other factors, including general economic conditions, may also have an impact[268] Overview of Operating Results This overview summarizes key financial metrics, including revenue, operating income, and net loss, for the reported periods | Metric | 3 Months Ended July 31, 2022 ($) | 3 Months Ended July 31, 2021 ($) | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Revenue | $222,899 | $214,617 | $440,805 | $415,521 | | Operating income | $1,510 | $11,537 | $2,008 | $15,979 | | Net loss attributable to Verint Systems Inc. common shares | $(7,612) | $(200) | $(12,526) | $(2,723) | | Diluted Net loss per common share | $(0.12) | $0.00 | $(0.19) | $(0.04) | - Revenue increased by 4% ($8.3 million) for the three months and 6% ($25.3 million) for the six months ended July 31, 2022, compared to the prior year periods, driven by recurring revenue growth[270][273] - Operating income decreased significantly by $10.0 million (3 months) and $14.0 million (6 months) due to a substantial increase in operating expenses[271][274] - Net loss attributable to common shares widened substantially to $(7.6) million (3 months) and $(12.5) million (6 months) in 2022[272][274] Foreign Currency Exchange Rates' Impact on Results of Operations This section analyzes the impact of strengthening U.S. dollar on revenue and operating income for the reported periods - The strengthening U.S. dollar relative to the British pound sterling, euro, and Australian dollar resulted in an overall decrease in U.S. dollar-denominated revenue and expenses[277][278] - For the three months ended July 31, 2022, had foreign currency exchange rates remained unchanged, revenue would have been approximately $5.6 million higher, and operating income would have been approximately $1.6 million lower[277] - For the six months ended July 31, 2022, had foreign currency exchange rates remained unchanged, revenue would have been approximately $8.2 million higher, and operating income would have been approximately $1.3 million lower[278] Revenue This section details revenue performance by type, highlighting growth in recurring cloud revenue and decline in support and nonrecurring revenue | Revenue Type | 3 Months Ended July 31, 2022 ($) | 3 Months Ended July 31, 2021 ($) | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Recurring revenue | $166,440 | $156,178 | $325,807 | $300,631 | | - Total cloud revenue | $118,332 | $93,256 | $228,975 | $173,306 | | - Support revenue | $48,108 | $62,922 | $96,832 | $127,325 | | Nonrecurring revenue | $56,459 | $58,439 | $114,998 | $114,890 | | Total revenue | $222,899 | $214,617 | $440,805 | $415,521 | - Recurring revenue increased by 7% (3 months) and 8% (6 months) YoY, primarily due to a 27% (3 months) and 32% (6 months) increase in cloud revenue, driven by unbundled SaaS (new deployments, support conversions) and bundled SaaS demand[282][283] - Support revenue decreased by 24% for both periods due to customer migration to cloud-based solutions[282][283] - Nonrecurring revenue decreased by 3% (3 months) and remained flat (6 months) YoY, with perpetual revenue decreasing due to a shift to cloud, partially offset by an increase in demand for offerings that include third-party hardware with embedded software[285][286] Cost of Revenue This section analyzes the cost of revenue, including recurring and nonrecurring components, and the impact of amortization and employee compensation | Cost Type | 3 Months Ended July 31, 2022 ($) | 3 Months Ended July 31, 2021 ($) | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Cost of recurring revenue | $40,852 | $37,636 | $81,880 | $75,712 | | Cost of nonrecurring revenue | $30,700 | $30,505 | $62,768 | $60,385 | | Amortization of acquired technology | $3,553 | $4,426 | $7,192 | $8,810 | | Total cost of revenue | $75,105 | $72,567 | $151,840 | $144,907 | - Cost of recurring revenue increased by 9% (3 months) and 8% (6 months) YoY, driven by higher employee compensation (headcount, wage inflation), contractor costs, and amortization expense related to capitalized software development costs[291][292] - Recurring revenue gross margins decreased from 76% to 75% for the three months and remained flat at 75% for the six months[291][292] - Cost of nonrecurring revenue increased by 1% (3 months) and 4% (6 months) YoY, mainly due to an increase in third-party hardware delivered and related shipping and handling costs, partially offset by a decrease in employee compensation[295][296] - Amortization of acquired technology decreased by 20% (3 months) and 18% (6 months) due to historical acquired technology intangible assets becoming fully amortized[298][300] Research and Development, Net This section discusses changes in net research and development expenses, primarily driven by increased compensation and contractor costs | Metric | 3 Months Ended July 31, 2022 ($) | 3 Months Ended July 31, 2021 ($) | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Research and development, net | $33,956 | $31,792 | $64,903 | $60,940 | - R&D expenses, net, increased by 7% for both the three and six months ended July 31, 2022, primarily due to higher stock-based compensation expenses, increased employee compensation (headcount), and contractor costs[303][304] Selling, General and Administrative Expenses This section analyzes the increase in selling, general, and administrative expenses, attributing it to facility costs, impairment charges, and compensation | Metric | 3 Months Ended July 31, 2022 ($) | 3 Months Ended July 31, 2021 ($) | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Selling, general and administrative | $105,705 | $91,376 | $208,587 | $179,022 | - SG&A expenses increased by 16% ($14.3 million) for the three months and 17% ($29.6 million) for the six months ended July 31, 2022[306] - Key drivers for the increase include accelerated facility costs and asset impairment charges ($4.9 million for 3 months, $12.5 million for 6 months), increased stock-based compensation ($4.9 million for 3 months, $6.3 million for 6 months), and higher employee compensation ($4.3 million for 3 months, $11.5 million for 6 months)[307][308] - A $1.8 million impairment charge was recorded to adjust the carrying amount of an office building to its fair value less costs to sell upon classification as held for sale[307][308] Amortization of Other Acquired Intangible Assets This section details the decrease in amortization expense for acquired intangible assets due to fully amortized historical assets | Metric | 3 Months Ended July 31, 2022 ($) | 3 Months Ended July 31, 2021 ($) | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Amortization of other acquired intangible assets | $6,623 | $7,345 | $13,467 | $14,673 | - Amortization expense decreased by 10% (3 months) and 8% (6 months) YoY, primarily due to acquired customer-related intangible assets from historical business combinations becoming fully amortized, partially offset by amortization expense associated with acquired intangible assets from recent business combinations[309][310] Other Expense, Net This section analyzes the significant decrease in net other expense, driven by lower interest expense and the absence of prior-year one-time items | Metric | 3 Months Ended July 31, 2022 ($) | 3 Months Ended July 31, 2021 ($) | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Interest income | $498 | $23 | $697 | $46 | | Interest expense | $(1,863) | $(2,199) | $(3,364) | $(7,218) | | Losses on early retirements of debt | $0 | $0 | $0 | $(2,474) | | Foreign currency gains (losses), net | $547 | $(463) | $2,260 | $(1,004) | | Losses on derivatives | $0 | $0 | $0 | $(14,374) | | Fair value change of future tranche right | $0 | $0 | $0 | $15,810 | | Other income, net | $467 | $156 | $2,141 | $4,206 | | Total other expense, net | $(898) | $(2,020) | $(526) | $(5,440) | - Total other expense, net, decreased significantly by 56% ($1.1 million) for the three months and 90% ($4.9 million) for the six months ended July 31, 2022[312][313][315] - Interest expense decreased by 15% (3 months) and 53% (6 months) due to lower outstanding borrowings and interest rates[313][316] - The company recorded net foreign currency gains of $0.5 million (3 months) and $2.3 million (6 months) in 2022, compared to net foreign currency losses in 2021[314][319] - The prior year included significant one-time items such as $2.5 million in losses on early debt retirements, $14.4 million in derivative losses, and a $15.8 million gain from the Future Tranche Right revaluation, which did not recur in 2022[317][320][321] Provision for Income Taxes This section explains the high effective income tax rate, primarily due to a valuation allowance against a deferred tax asset and U.S. taxation of foreign activities | Metric | 3 Months Ended July 31, 2022 ($) | 3 Months Ended July 31, 2021 ($) | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Provision for income taxes | $2,848 | $4,201 | $3,144 | $4,129 | | Effective income tax rate | 465.4% | 44.1% | 212.1% | 39.2% | - The effective income tax rate was 465.4% for the three months and 212.1% for the six months ended July 31, 2022, significantly higher than the 21% U.S. federal statutory rate[323][326] - This high rate was primarily due to a $2.1 million discrete income tax provision attributable to the recording of a valuation allowance against a deferred tax asset related to an asset held for sale in a foreign jurisdiction and U.S. taxation of certain foreign activities[324][327] Liquidity and Capital Resources This section discusses the company's liquidity and capital resources, including cash sources and uses, debt, and capital allocation strategies Overview This overview identifies primary cash sources and uses, the impact of the Apax investment, and the company's foreign earnings reinvestment strategy - Primary recurring sources of cash are proceeds from sales of products and services; primary uses are operating costs, debt service, stock repurchases, preferred stock dividends, and business acquisitions[330][333] - The $400.0 million Apax investment in convertible preferred stock was used to repay outstanding indebtedness, fund a portion of stock repurchase programs, and for general corporate purposes[332][337] - The 2014 Notes were settled for $389.8 million in cash in May 2021[334] - The company issued $315.0 million in 2021 Notes in April 2021, using proceeds for capped calls, debt repayment, interest rate swap termination, and stock repurchases[337] - A portion of foreign earnings is intended for indefinite reinvestment, but repatriation could occur if more capital is required in the United States, potentially resulting in higher effective tax rates[339][340] Capital Allocation Framework This section outlines the company's capital allocation priorities, focusing on business combinations, debt repayment, and stock repurchases after operational needs - After cash utilization for working capital, capital expenditures, required debt service, and preferred stock dividends, the primary usage of cash is expected to be for business combinations, repayment of outstanding indebtedness, and/or stock repurchases[342] Condensed Consolidated Cash Flow Activity This section analyzes changes in cash flows from operating, investing, and financing activities for the reported periods | Metric | 6 Months Ended July 31, 2022 ($) | 6 Months Ended July 31, 2021 ($) | | :-------------------------------------------------------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by operating activities from continuing operations | $46,680 | $26,853 | | Net cash (used in) provided by investing activities | $(13,954) | $27,390 | | Net cash used in financing activities | $(132,437) | $(421,912) | | Net decrease in cash, cash equivalents, restricted cash, and restricted cash equivalents | $(102,286) | $(379,623) | - Operating cash flow from continuing operations increased by $19.8 million YoY, driven by $31.3 million lower combined interest and net income tax payments and a favorable impact from changes in operating assets and liabilities[345] - Investing activities shifted from a net inflow of $27.4 million in 2021 to a net outflow of $14.0 million in 2022, primarily due to fewer maturities and sales of short-term investments[347][348] - Financing activities used significantly less cash in 2022 ($132.4 million) compared to 2021 ($421.9 million), as the prior year included large debt settlements and spin-off related cash transfers[350][351] Liquidity and Capital Resources Requirements This section assesses the sufficiency of current liquidity to meet future operating costs, debt service, dividends, and capital expenditures - Current cash, cash equivalents, short-term investments, and cash generated from operations are expected to be sufficient to meet anticipated operating costs, required debt service, preferred stock dividends, working capital needs, and capital expenditures for at least the next 12 months[352] - A new stock repurchase program authorized up to 2,000,000 shares for the fiscal year ending January 31, 2023, with $105.7 million used to repurchase shares during the six months ended July 31, 2022[355] - Liquidity could be negatively impacted by a decrease in demand for products and services or adverse macroeconomic factors[353] Financing Arrangements This section details the company's financing arrangements, including convertible senior notes, term loans, revolving credit facilities, and related derivative instruments - The $315.0 million 0.25% convertible senior notes due April 15, 2026 (2021 Notes) were issued in April 2021, with proceeds used for capped calls, debt repayment, interest rate swap termination, and stock repurchases[356][357] - Capped Calls were executed to reduce potential dilution from the 2021 Notes, effectively increasing the conversion price from $62.08 to $100.00 per share[361][362] - The $400.0 million 2014 Notes matured on June 1, 2021, and were settled for $389.8 million in cash, plus approximately 1.25 million common shares for the conversion premium[364][365] - The Credit Agreement provides for $725.0 million in senior secured credit facilities, including a $100.0 million Term Loan (maturing June 2024) and a $300.0 million Revolving Credit Facility (maturing April 2026, undrawn)[372] - The Term Loan interest rate was 3.80% (effective 4.00%) at July 31, 2022, and the company's Leverage Ratio was approximately 1.2 to 1, well within the covenant limit[377][379] Contractual Obligations This section outlines principal commitments, including long-term debt, preferred stock dividends, operating leases, and non-current tax reserves - Principal commitments primarily consist of long-term debt, dividends on Preferred Stock, and leases for office space[384] - Total operating lease liabilities were $39.9 million at July 31, 2022, with plans to exit or reduce additional office leases in the future[385] - Non-current tax reserves for uncertain tax positions were $16.5 million at July 31, 2022, with no significant payments expected within the next 12 months[387] Contingent Payments Associated with Business Combinations This section reports on contingent consideration payments made for business combinations and the expectation of no future payments - $7.5 million in contingent consideration payments were made for the six months ended July 31, 2022[390] - No additional contingent consideration payments are expected as the performance periods associated with these arrangements expired during the year ended January 31, 2022[390] Recent Accounting Pronouncements This section refers to Note 1 for details on recent accounting pronouncements and their potential impact on financial statements - Refer to Note 1, 'Basis of Presentation and Significant Accounting Policies,' for a description of recent accounting pronouncements and their potential impact on the condensed consolidated financial statements[391] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, including interest rate and foreign currency fluctuations, and its risk management strategies - Verint is exposed to market risk related to changes in interest rates and foreign currency exchange rate fluctuations, which are managed through derivative instruments like foreign currency forward exchange contracts and interest rate swap agreements[392] - The 2021 Notes have a fixed annual interest rate of 0.25%, but their fair values are subject to interest rate risk, market risk, and other factors due to the convertible feature[394] - The Term Loan has a variable interest rate (3.80% at July 31, 2022), and a hypothetical 10% change in interest rates would not have a material impact on the financial statements[395] - The planned phase-out of LIBOR by June 2023 for U.S. dollar settings introduces uncertainty regarding alternative reference interest rates for the credit facility[397] - Inflation risk is being monitored, and sustained or increased inflationary pressure on costs (labor, sales and marketing, hosting) could harm the business if not fully offset by price increases[398] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures and notes no material changes in internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of July 31, 2022[402] - There were no changes to internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the three months ended July 31, 2022[403] - The company has adopted a hybrid work model, and the design of its financial reporting processes, systems, and controls allows for remote execution with accessibility to secure data[404] - Control systems, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that objectives will be achieved, and have inherent limitations such as faulty judgments, simple errors, circumvention by individual acts or collusion, or management override[405] Part II. Other Information This part provides additional information, including legal proceedings, risk factors, equity security sales, defaults, and exhibits Item 1. Legal Proceedings This section refers to Note 15 for detailed information regarding the company's legal proceedings and related commitments and contingencies - Refer to Note 15, 'Commitments and Contingencies,' in Part I, Item 1 for information regarding legal proceedings[407] Item 1A. Risk Factors This section confirms no material changes to previously disclosed risk factors and advises considering potential additional unknown risks - There have been no material changes to the Risk Factors described in Part I, Item 1A of the Annual Report on Form 10-K for the year ended January 31, 2022[408] - Additional risks and uncertainties not currently known or deemed insignificant could also materially and adversely affect the business, financial condition, or operating results in the future[408] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered equity sales and details common stock repurchase activities to offset equity compensation dilution - No unregistered sales of equity securities occurred during the period[409] - The company repurchased 2,000,000 shares of common stock at a cost of $105.7 million during the six months ended July 31, 2022, under a stock repurchase program to offset dilution from its equity compensation program[410] - Minor share repurchases were also made to facilitate income tax withholding or payments for directors, officers, and other employees upon vesting of equity awards[411] Item 3. Defaults Upon Senior Securities This section confirms that there were no defaults upon senior securities during the reported period - There were no defaults upon senior securities[413] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company's operations - Mine safety disclosures are not applicable[414] Item 5. Other Information This section indicates that there is no other information requiring disclosure - No other information is applicable for disclosure[415] Item 6. Exhibits This section lists the exhibits filed, including CEO and CFO certifications and XBRL taxonomy documents - The report includes certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 1350 of the Sarbanes-Oxley Act of 2002, along with XBRL instance, schema, calculation, definition, label, and presentation linkbase documents[417] Signatures This section contains the Chief Financial Officer's signature, certifying the report filing on behalf of Verint Systems Inc - The report was duly signed on September 7, 2022, by Douglas E. Robinson, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) of Verint Systems Inc[421]