Verint(VRNT) - 2022 Q2 - Quarterly Report

Cautionary Note on Forward-Looking Statements The report contains forward-looking statements subject to known and unknown risks, with actual results potentially differing materially from expectations - Macroeconomic uncertainties, including COVID-19 impact on IT spending[11] - Challenges in the transition to cloud, emphasizing subscription renewal rates and potential result variability[11] - Risks from aggressive competition, reliance on third-party suppliers, and significant international operations[11][13] - Risks from the Cognyte spin-off, including unachieved benefits or unexpected liabilities[13] Part I. Financial Information Financial Statements (Unaudited) Unaudited Q2 2021 financial statements show post-spin-off performance, with reduced assets and liabilities, recurring revenue growth, and significant financing activities Condensed Consolidated Balance Sheets As of July 31, 2021, total assets decreased to $2.28 billion from $3.26 billion post-Cognyte spin-off, with cash and total liabilities also significantly reduced Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | July 31, 2021 | January 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $320,439 | $585,273 | | Total current assets | $572,495 | $1,277,742 | | Goodwill | $1,335,816 | $1,327,407 | | Total assets | $2,278,019 | $3,261,295 | | Liabilities & Equity | | | | Total current liabilities | $391,617 | $1,163,439 | | Long-term debt | $405,873 | $402,781 | | Total liabilities | $897,030 | $1,773,262 | | Total stockholders' equity | $944,668 | $1,282,564 | Condensed Consolidated Statements of Operations Q2 2021 total revenue grew 5.2% to $214.6 million driven by recurring revenue, but operating income declined to $11.5 million due to higher expenses, with net loss from continuing operations significantly narrowed Key Operating Results (in thousands) | Metric | Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $214,617 | $204,080 | $415,521 | $389,945 | | Recurring Revenue | $156,178 | $139,267 | $300,631 | $268,337 | | Gross Profit | $142,050 | $137,179 | $270,614 | $252,141 | | Operating Income | $11,537 | $21,573 | $15,979 | $19,532 | | Net Income (Loss) from Continuing Operations | $5,316 | $(9,370) | $6,410 | $(23,788) | | Net (Loss) Attributable to Common Shares | $(200) | $6,010 | $(2,723) | $(4) | Net Loss Per Share from Continuing Operations | Metric | Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Basic EPS | $0.00 | $(0.19) | $(0.04) | $(0.42) | | Diluted EPS | $0.00 | $(0.18) | $(0.04) | $(0.42) | Condensed Consolidated Statements of Cash Flows Six months ended July 31, 2021, saw operating cash flow decrease to $26.9 million, investing activities provide $27.4 million, and financing activities use $421.9 million for debt settlements, repayments, and share repurchases, offset by new debt and preferred stock Summary of Cash Flows - Continuing Operations (Six Months Ended July 31, in thousands) | Cash Flow Category | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $26,853 | $98,123 | | Net cash provided by (used in) investing activities | $27,390 | $(62,789) | | Net cash (used in) provided by financing activities | $(421,912) | $287,284 | Notes to Condensed Consolidated Financial Statements Notes detail the Cognyte spin-off, $200 million Apax investment, new revenue disaggregation, ASU 2020-06 adoption for convertible instruments, and the post-quarter acquisition of Conversocial for $48.4 million - Cognyte Software Ltd. spin-off completed on February 1, 2021, with its financial results now presented as discontinued operations[42][62] - Apax Partners completed a $200.0 million investment in Series B convertible preferred stock on April 6, 2021[44][152] - Adoption of ASU No. 2020-06 simplified accounting for convertible instruments, eliminating the separation of debt and equity components[58][59] - Post-quarter, Verint acquired Conversocial Limited for approximately $48.4 million in cash on August 23, 2021[253][254] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's transition to a pure-play customer engagement firm post-Cognyte spin-off, highlighting strong cloud demand, 5% YoY revenue growth, decreased operating income from resumed investments, and significant capital restructuring Overview Post-Cognyte spin-off, the company transformed into a pure-play customer engagement entity, securing a $400 million Apax Partners investment and acquiring Conversocial, driven by strong cloud demand and digital transformation - Cognyte Software Ltd. spin-off completed on February 1, 2021, establishing the company as a pure-play customer engagement entity[258] - Apax Partners completed a total $400 million investment with a second $200 million tranche via Series B Preferred Stock on April 6, 2021[262] - Conversocial acquired on August 23, 2021, to enhance messaging platform capabilities[264] - Improved demand for cloud solutions driven by accelerated digital transformation, addressing the 'Engagement Capacity Gap'[266][269] Results of Operations Q2 FY22 revenue grew 5% YoY to $214.6 million, driven by 12% recurring revenue and 49% cloud revenue surge, while operating income declined to $11.5 million due to increased SG&A and R&D expenses Revenue by Category - Q2 (Three Months Ended July 31, in thousands) | Revenue Category | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Recurring Revenue | | | | | Total cloud revenue | $93,256 | $62,557 | 49% | | Support revenue | $62,922 | $76,710 | (18)% | | Total Recurring | $156,178 | $139,267 | 12% | | Nonrecurring Revenue | | | | | Perpetual revenue | $32,349 | $35,829 | (10)% | | Professional services | $26,090 | $28,984 | (10)% | | Total Nonrecurring | $58,439 | $64,813 | (10)% | | Total Revenue | $214,617 | $204,080 | 5% | - Operating income decrease primarily due to $13.7 million (18%) increase in SG&A and $1.7 million (5%) increase in R&D, net[277][306][309] - Increased operating expenses resulted from higher employee compensation, contractor costs, and stock-based compensation, contrasting with prior-year COVID-19 cost reductions[306][309] Liquidity and Capital Resources Capital restructuring included issuing $315 million in convertible notes and receiving $198.7 million from preferred stock, used to settle $386.9 million in 2014 Notes, repay $309 million of term loan, repurchase $75.4 million in stock, and terminate an interest rate swap - Issued $315.0 million of 0.25% convertible senior notes due 2026 with capped call transactions to reduce potential dilution[343][364][369] - Received $198.7 million in net proceeds from Series B Preferred Stock issuance to Apax Partners[357] - Proceeds and cash used to settle $389.8 million in 2014 Notes, repay $309.0 million of the 2017 Term Loan, and terminate an interest rate swap for $16.5 million[357][374][384][395] - Repurchased approximately 1.6 million shares of common stock for $75.4 million under a new program authorized in March 2021[363] Quantitative and Qualitative Disclosures About Market Risk Primary market risks are interest rate changes on variable-rate debt and foreign currency fluctuations, with exposure reduced by $309.0 million term loan repayment and $16.5 million swap termination, while monitoring LIBOR phase-out - Exposed to interest rate risk on its 2017 Credit Agreement, with variable rates based on LIBOR[405] - An interest rate swap was terminated early on April 13, 2021, for a $16.5 million payment after significant term loan repayment, mitigating risk[406] - Monitoring the planned phase-out of LIBOR after 2021/2023 and the transition to alternative rates such as SOFR[407] Controls and Procedures As of July 31, 2021, the CEO and CFO concluded disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded disclosure controls and procedures were effective as of July 31, 2021[411] - No material changes occurred to the company's internal control over financial reporting during the quarter[412] Part II. Other Information Legal Proceedings The company is involved in an ongoing Israeli legal action concerning stock options, a liability from the 2013 CTI merger, with indemnification rights from Mavenir Inc. and Cognyte - Verint is party to an Israeli legal action inherited from the 2013 CTI merger, concerning alleged damages related to stock option exercise suspensions[245][247] - The company is entitled to indemnification from Mavenir Inc. and from Cognyte for potential losses not covered by Mavenir[247][251] Risk Factors No material changes occurred to risk factors previously disclosed in the company's Annual Report on Form 10-K or Quarterly Report on Form 10-Q - No material changes to previously disclosed risk factors[417] Unregistered Sales of Equity Securities and Use of Proceeds In Q2, Verint issued approximately 1.25 million unregistered shares to settle 2014 Notes conversion premium, offset by receiving approximately 1.29 million shares from convertible note hedge exercises - Issued approximately 1,250,000 unregistered shares to settle the 2014 Notes conversion premium[418] - Received 1,292,671 shares of common stock from exercising convertible note hedge transactions, offsetting dilution from note conversion[418][419] Exhibits Exhibits filed with Form 10-Q include CEO and CFO certifications and XBRL data files - Exhibits include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and XBRL interactive data files (101 series)[427]