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Verint Announces Second Quarter Results

Verint® Systems Inc. (NASDAQ:VRNT), a global leader in Actionable Intelligence® solutions and value-added services, today announced results for the three and six months ended July 31, 2014.

“We are pleased with our second quarter revenue of $285 million, and diluted earnings per share of $0.72, both on a non-GAAP basis. Our financial results, market leadership and double digit revenue growth have made us more optimistic about the year, and we are raising our annual guidance for the second time this year,” said Dan Bodner, CEO and President.

Bodner added, "Our focus on actionable intelligence solutions combined with our on-going innovation across all of our market areas, including new growth markets such as Cyber Security, positions us well for long-term growth.”

Financial Highlights

Below is selected unaudited financial information for the three and six months ended July 31, 2014 prepared in accordance with generally accepted accounting principles (“GAAP”) and not in accordance with GAAP (“non-GAAP”).

     
Three Months Ended July 31, 2014 - GAAP Three Months Ended July 31, 2014 - Non-GAAP
  Revenue: $276.8 million   Revenue: $284.7 million
Operating Income: $11.5 million Operating Income: $58.6 million

Diluted EPS:  ($0.21)

Diluted EPS:  $0.72

 
Six Months Ended July 31, 2014 - GAAP Six Months Ended July 31, 2014 - Non-GAAP
Revenue: $534.2 million Revenue: $554.1 million
Operating Income: $12.5 million Operating Income: $109.6 million
Diluted EPS: $0.28 Diluted EPS: $1.44
 

Financial Outlook

Below is Verint’s non-GAAP outlook for the year ending January 31, 2015.

  • We are raising our revenue outlook by $15 million, to a range of $1.125 billion to $1.175 billion.
  • We expect that the increase in our revenue outlook will drive an increase in profitability that more than offsets the earnings per share dilution from our recent equity and convertible note offering. As a result, we are raising our outlook for diluted earnings per share to a range of $3.35 to $3.50.

Conference Call Information

We will conduct a conference call today at 4:30 p.m. ET to discuss our results for the three and six months ended July 31, 2014 and outlook for the year ending January 31, 2015. An online, real-time webcast of the conference call will be available on our website at www.verint.com. The conference call can also be accessed live via telephone at 1-800-510-0219 (United States and Canada) and 1-617-614-3451 (international) and the passcode is 95938942. Please dial in 5-10 minutes prior to the scheduled start time.

About Non-GAAP Financial Measures

This press release and the accompanying tables include non-GAAP financial measures. For a description of these non-GAAP financial measures, including the reasons management uses each measure, and reconciliations of these non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with GAAP, please see Tables 2 and 3 as well as "Supplemental Information About Non-GAAP Financial Measures" at the end of this press release. Because we do not predict special items that might occur in the future, and our outlook is developed at a level of detail different than that used to prepare GAAP financial measures, we are not providing a reconciliation to GAAP of our forward-looking financial measures for the year ending January 31, 2015.

About Verint Systems Inc.

Verint® (NASDAQ: VRNT) is a global leader in Actionable Intelligence® solutions. Actionable Intelligence is a necessity in a dynamic world of massive information growth because it empowers organizations with crucial insights and enables decision makers to anticipate, respond, and take action. Our Actionable Intelligence solutions help organizations address three important challenges: Customer Engagement Optimization; Security Intelligence; and Fraud, Risk, and Compliance. Today, more than 10,000 organizations in over 180 countries, including over 80 percent of the Fortune 100, use Verint solutions to improve enterprise performance and make the world a safer place. Learn more at www.verint.com.

Cautions About Forward-Looking Statements

This press release contains forward-looking statements, including statements regarding expectations, predictions, views, opportunities, plans, strategies, beliefs, and statements of similar effect relating to Verint Systems Inc. These forward-looking statements are not guarantees of future performance and they are based on management's expectations that involve a number of known and unknown risks, uncertainties, assumptions and other important factors, any of which could cause our actual results or conditions to differ materially from those expressed in or implied by the forward-looking statements. Some of the factors that could cause our actual results or conditions to differ materially from current expectations include, among others: uncertainties regarding the impact of general economic conditions in the United States and abroad, particularly in information technology spending and government budgets, on our business; risks associated with our ability to keep pace with technological changes and evolving industry standards in our product offerings and to successfully develop, launch, and drive demand for new and enhanced, innovative, high-quality products that meet or exceed customer needs; risks due to aggressive competition in all of our markets, including with respect to maintaining margins and sufficient levels of investment in our business; risks created by the continued consolidation of our competitors or the introduction of large competitors in our markets with greater resources than we have; risks associated with our ability to successfully compete for, consummate, and implement mergers and acquisitions, including risks associated with capital constraints, valuations, costs and expenses, maintaining profitability levels, management distraction, post-acquisition integration activities, and potential asset impairments; risks relating to our ability to effectively and efficiently execute on our growth strategy, including managing investments in our business and operations and enhancing and securing our internal and external operations; risks associated with our ability to effectively and efficiently allocate limited financial and human resources to business, development, strategic, or other opportunities that may not come to fruition or produce satisfactory returns; risks that we may be unable to maintain and enhance relationships with key resellers, partners, and systems integrators; risks associated with the mishandling or perceived mishandling of sensitive or confidential information, security lapses, or with information technology system failures or disruptions; risks associated with our significant international operations, including, among others, in Israel, Europe, and Asia, exposure to regions subject to political or economic instability, and fluctuations in foreign exchange rates; risks associated with a significant amount of our business coming from domestic and foreign government customers, including the ability to maintain security clearances for certain projects; risks associated with complex and changing local and foreign regulatory environments in the jurisdictions in which we operate; risks associated with our ability to recruit and retain qualified personnel in regions in which we operate; challenges associated with selling sophisticated solutions, long sales cycles, and emphasis on larger transactions, including in assisting customers in realizing the benefits of our solutions and in accurately forecasting revenue and expenses and in maintaining profitability; risks that our intellectual property rights may not be adequate to protect our business or assets or that others may make claims on our intellectual property or claim infringement on their intellectual property rights; risks that our products may contain defects, which could expose us to substantial liability; risks associated with our dependence on a limited number of suppliers or original equipment manufacturers for certain components of our products, including companies that may compete with us or work with our competitors; risks that our customers or partners delay or cancel orders or are unable to honor contractual commitments due to liquidity issues, challenges in their business, or otherwise; risks that we may experience liquidity or working capital issues and related risks that financing sources may be unavailable to us on reasonable terms or at all; risks associated with significant leverage resulting from our current debt position, including with respect to liquidity considerations, covenant limitations and compliance, fluctuations in interest rates, dilution considerations (with respect to our convertible notes), and our ability to maintain our credit ratings; risks arising as a result of contingent or other obligations or liabilities assumed in our acquisition of our former parent company, Comverse Technology, Inc. (“CTI”), or associated with formerly being consolidated with, and part of a consolidated tax group with, CTI, or as a result of CTI's former subsidiary, Comverse, Inc., being unwilling or unable to provide us with certain indemnities or transition services to which we are entitled; risks relating to our ability to successfully implement and maintain adequate systems and internal controls for our current and future operations and reporting needs and related risks of financial statement omissions, misstatements, restatements, or filing delays; and risks associated with changing tax rates, tax laws and regulations, and the continuing availability of expected tax benefits, including those expected as a result of acquisitions. We assume no obligation to revise or update any forward-looking statement, except as otherwise required by law. For a detailed discussion of these risk factors, see our Annual Report on Form 10-K for the fiscal year ended January 31, 2014, our Quarterly Report on Form 10-Q for the quarter ended July 31, 2014, when filed, and other filings we make with the SEC.

VERINT, ACTIONABLE INTELLIGENCE, MAKE BIG DATA ACTIONABLE, CUSTOMER-INSPIRED EXCELLENCE, INTELLIGENCE IN ACTION, IMPACT 360, WITNESS, VERINT VERIFIED, KANA, LAGAN, VOVICI, GMT, VICTRIO, AUDIOLOG, ENTERPRISE INTELLIGENCE SOLUTIONS, SECURITY INTELLIGENCE SOLUTIONS, VOICE OF THE CUSTOMER ANALYTICS, NEXTIVA, EDGEVR, RELIANT, VANTAGE, STAR-GATE, ENGAGE, CYBERVISION, FOCALINFO, SUNTECH, and VIGIA are trademarks or registered trademarks of Verint Systems Inc. or its subsidiaries. Other trademarks mentioned are the property of their respective owners.

 

Table 1
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)

 
     

Three Months Ended
July 31,

 

Six Months Ended
July 31,

(in thousands, except per share data) 2014     2013 2014   2013
Revenue:
Product $ 113,175 $ 97,865 $ 221,311 $ 185,215
Service and support 163,641   124,582   312,898   242,018  
Total revenue 276,816   222,447   534,209   427,233  
Cost of revenue:
Product 32,122 30,090 71,599 61,262
Service and support 61,869 40,170 118,857 78,668
Amortization of acquired technology and backlog 8,564   2,347   14,922   5,985  
Total cost of revenue 102,555   72,607   205,378   145,915  
Gross profit 174,261   149,840   328,831   281,318  
Operating expenses:
Research and development, net 44,077 31,203 85,400 61,231
Selling, general and administrative 107,160 81,364 208,208 163,068
Amortization of other acquired intangible assets 11,554   6,010   22,757   12,043  
Total operating expenses 162,791   118,577   316,365   236,342  
Operating income 11,470   31,263   12,466   44,976  
Other income (expense), net:
Interest income 250 166 475 321
Interest expense (9,383 ) (7,383 ) (19,609 ) (14,571 )
Losses on early retirements of debt (5,454 ) (173 ) (12,546 ) (9,879 )
Other (expense) income, net (1,729 ) (2,559 ) 1,099   (4,367 )
Total other expense, net (16,316 ) (9,949 ) (30,581 ) (28,496 )
(Loss) income before provision for (benefit from) income taxes (4,846 ) 21,314 (18,115 ) 16,480
Provision for (benefit from) income taxes 5,534   2,809   (36,554 ) 5,912  
Net (loss) income (10,380 ) 18,505 18,439 10,568
Net income attributable to noncontrolling interest 1,898   969   2,761   2,185  
Net (loss) income attributable to Verint Systems Inc. (12,278 ) 17,536 15,678 8,383
Dividends on preferred stock       (174 )
Net (loss) income attributable to Verint Systems Inc. common shares $ (12,278 ) $ 17,536   $ 15,678   $ 8,209  
 
Net (loss) income per common share attributable to Verint Systems Inc.:
Basic $ (0.21 ) $ 0.33   $ 0.28   $ 0.16  
Diluted $ (0.21 ) $ 0.33   $ 0.28   $ 0.15  
 
Weighted-average common shares outstanding:
Basic 57,158   52,977   55,449   52,484  
Diluted 57,158   53,637   56,559   53,176  
 
 

Table 2
VERINT SYSTEMS INC. AND SUBSIDIARIES
Segment Revenue
(Unaudited)

 
     

Three Months Ended
July 31,

 

Six Months Ended
July 31,

(in thousands) 2014   2013 2014   2013
GAAP Revenue By Segment:
Enterprise Intelligence $ 160,775 $ 125,873 $ 315,593 $ 238,796
Communications Intelligence 86,990 64,438 163,125 127,503
Video Intelligence 29,051   32,136   55,491   60,934
GAAP Total Revenue $ 276,816   $ 222,447   $ 534,209   $ 427,233
 
Revenue Adjustments Related to Acquisitions:
Enterprise Intelligence $ 7,704 $ 116 $ 19,519 $ 369
Communications Intelligence 208 213 322 411
Video Intelligence       167
Total Revenue Adjustments Related to Acquisitions $ 7,912   $ 329   $ 19,841   $ 947
 
Non-GAAP Revenue By Segment:
Enterprise Intelligence $ 168,479 $ 125,989 $ 335,112 $ 239,165
Communications Intelligence 87,198 64,651 163,447 127,914
Video Intelligence 29,051   32,136   55,491   61,101
Non-GAAP Total Revenue $ 284,728   $ 222,776   $ 554,050   $ 428,180
 
 

Table 3
VERINT SYSTEMS INC. AND SUBSIDIARIES
Reconciliation of GAAP to Non-GAAP Results
(Unaudited)

 
   

Three Months Ended
July 31,

 

Six Months Ended
July 31,

(in thousands, except per share data) 2014   2013 2014   2013
 

Table of Reconciliation from GAAP Gross Profit to Non-GAAP Gross Profit

 
GAAP gross profit $ 174,261 $ 149,840 $ 328,831 $ 281,318
Revenue adjustments related to acquisitions 7,912 329 19,841 947
Amortization of acquired technology and backlog 8,564 2,347 14,922 5,985
Stock-based compensation expenses 1,241 682 2,326 1,079
M&A and other adjustments 140   123   4,665   378  
Non-GAAP gross profit $ 192,118   $ 153,321   $ 370,585   $ 289,707  
 

Table of Reconciliation from GAAP Operating Income to Non-GAAP Operating Income and Non-GAAP EBITDA

 
GAAP operating income $ 11,470 $ 31,263 $ 12,466 $ 44,976
Revenue adjustments related to acquisitions 7,912 329 19,841 947
Amortization of acquired technology and backlog 8,564 2,347 14,922 5,985
Amortization of other acquired intangible assets 11,554 6,010 22,757 12,043
Stock-based compensation expenses 14,438 9,192 25,927 15,425
M&A and other adjustments 4,616   2,268   13,665   8,748  
Non-GAAP operating income 58,554   51,409   109,578   88,124  
GAAP depreciation and amortization (1) 25,162 12,292 47,740 26,149
Amortization of acquired technology and backlog (8,564 ) (2,347 ) (14,922 ) (5,985 )
Amortization of other acquired intangible assets (11,554 ) (6,010 ) (22,757 ) (12,043 )
Non-GAAP depreciation and amortization 5,044   3,935   10,061   8,121  
Non-GAAP EBITDA $ 63,598   $ 55,344   $ 119,639   $ 96,245  
 

Table of Reconciliation from GAAP Other Expense, Net to Non-GAAP Other Expense, Net

 
GAAP other expense, net $ (16,316 ) $ (9,949 ) $ (30,581 ) $ (28,496 )
Losses on early retirements of debt 5,454 173 12,546 9,879
Unrealized (gains) losses on derivatives, net (919 ) 75 (180 ) (336 )
Amortization of convertible note discount 1,148 1,148
M&A and other adjustments 50   1,118   75   1,297  
Non-GAAP other expense, net $ (10,583 ) $ (8,583 ) $ (16,992 ) $ (17,656 )
 

Table of Reconciliation from GAAP Provision for (Benefit from) Income Taxes to Non-GAAP Provision for Income Taxes

 
GAAP provision for (benefit from) income taxes $ 5,534 $ 2,809 $ (36,554 ) $ 5,912
Non-cash tax adjustments (1,249 ) 1,692   45,137   1,618  
Non-GAAP provision for income taxes $ 4,285   $ 4,501   $ 8,583   $ 7,530  
 

Table of Reconciliation from GAAP Net (Loss) Income Attributable to Verint Systems Inc. to Non-GAAP Net Income Attributable to Verint Systems Inc.

 
GAAP net (loss) income attributable to Verint Systems Inc. $ (12,278 ) $ 17,536   $ 15,678   $ 8,383  
Revenue adjustments related to acquisitions 7,912 329 19,841 947
Amortization of acquired technology and backlog 8,564 2,347 14,922 5,985
Amortization of other acquired intangible assets 11,554 6,010 22,757 12,043
Stock-based compensation expenses 14,438 9,192 25,927 15,425
M&A and other adjustments 4,666 3,386 13,740 10,045
Losses on early retirements of debt 5,454 173 12,546 9,879
Unrealized (gains) losses on derivatives, net (919 ) 75 (180 ) (336 )
Amortization of convertible note discount 1,148 1,148
Non-cash tax adjustments 1,249   (1,692 ) (45,137 ) (1,618 )
Total GAAP net (loss) income adjustments 54,066   19,820   65,564   52,370  
Non-GAAP net income attributable to Verint Systems Inc. $ 41,788   $ 37,356   $ 81,242   $ 60,753  
 

Table of Reconciliation from GAAP Net (Loss) Income Attributable to Verint Systems Inc. Common Shares to Non-GAAP Net Income Attributable to Verint Systems Inc. Common Shares

 
GAAP net (loss) income attributable to Verint Systems Inc. common shares $ (12,278 ) $ 17,536 $ 15,678 $ 8,209
Total GAAP net (loss) income adjustments 54,066   19,820   65,564   52,370  
Non-GAAP net income attributable to Verint Systems Inc. common shares $ 41,788   $ 37,356   $ 81,242   $ 60,579  
 

Table Comparing GAAP Diluted Net (Loss) Income Per Common Share Attributable to Verint Systems Inc. to Non-GAAP Diluted Net Income Per Common Share Attributable to Verint Systems Inc.

 
GAAP diluted net (loss) income per common share attributable to Verint Systems Inc. $ (0.21 ) $ 0.33   $ 0.28   $ 0.15  
 
Non-GAAP diluted net income per common share attributable to Verint Systems Inc. $ 0.72   $ 0.70   $ 1.44   $ 1.14  
 
Shares used in computing GAAP diluted net (loss) income per common share 57,158   53,637   56,559   53,176  
 
Shares used in computing non-GAAP diluted net income per common share 58,179   53,637   56,559   53,424  
 
(1) Adjusted for financing fee amortization.
 
 

Table 4
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)

 
    July 31,   January 31,
(in thousands, except share and per share data) 2014 2014
Assets
Current Assets:
Cash and cash equivalents $ 186,669 $ 378,618
Restricted cash and bank time deposits 41,336 6,423
Short-term investments 39,361 32,049
Accounts receivable, net of allowance for doubtful accounts of $0.9 million and $1.2 million, respectively 235,893 194,312
Inventories 22,933 10,693
Deferred cost of revenue 10,767 10,818
Prepaid expenses and other current assets 73,319   61,478  
Total current assets 610,278   694,391  
Property and equipment, net 55,929 40,145
Goodwill 1,241,879 853,389
Intangible assets, net 363,410 132,847
Capitalized software development costs, net 7,901 8,483
Long-term deferred cost of revenue 10,517 9,843
Other assets 43,701   33,809  
Total assets $ 2,333,615   $ 1,772,907  
 
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 70,297 $ 65,656
Accrued expenses and other current liabilities 210,264 179,148
Current maturities of long-term debt 61 6,555
Deferred revenue 176,556   162,124  
Total current liabilities 457,178   413,483  
Long-term debt 731,891 635,830
Long-term deferred revenue 16,201 13,661
Other liabilities 98,893   76,815  
Total liabilities 1,304,163 1,139,789
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock - $0.001 par value; authorized 2,207,000 shares at July 31, 2014 and January 31, 2014; none issued.

Common stock - $0.001 par value; authorized 120,000,000 shares. Issued 60,916,000 and

53,907,000 shares; outstanding 60,568,000 and 53,605,000 shares at July 31,

2014 and January 31, 2014, respectively.

61 54
Additional paid-in capital 1,289,357 924,663
Treasury stock, at cost - 348,000 and 302,000 shares at July 31, 2014 and January 31, 2014, respectively. (10,251 ) (8,013 )
Accumulated deficit (234,327 ) (250,005 )
Accumulated other comprehensive loss (24,396 ) (39,725 )
Total Verint Systems Inc. stockholders' equity 1,020,444 626,974
Noncontrolling interest 9,008   6,144  
Total stockholders' equity 1,029,452   633,118  
Total liabilities and stockholders' equity $ 2,333,615   $ 1,772,907  
 
 

Table 5
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 
   

Six Months Ended
July 31,

(in thousands) 2014   2013
Cash flows from operating activities:
Net income $ 18,439 $ 10,568
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 49,192 27,284
Stock-based compensation - equity portion 23,106 13,688
Amortization of discount on convertible notes 1,148
Reduction of valuation allowance resulting from acquisition of KANA (45,171 )
Non-cash gains on derivative financial instruments, net (103 ) (676 )
Losses on early retirement of debt 12,546 9,879
Other non-cash items, net 7,213 795
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable (23,189 ) 2,517
Inventories (8,958 ) 332
Deferred cost of revenue (545 ) (662 )
Prepaid expenses and other assets 6,716 19,941
Accounts payable and accrued expenses 22,288 (8,446 )
Deferred revenue 7,675 (3,143 )
Other, net 16   581  
Net cash provided by operating activities 70,373   72,658  
 
Cash flows from investing activities:
Cash paid for business combinations, including adjustments, net of cash acquired (602,943 )
Purchases of property and equipment (9,358 ) (5,624 )
Purchases of investments (17,187 ) (124,990 )
Sales and maturities of investments 9,790 20,000
Cash paid for capitalized software development costs (2,892 ) (1,604 )
Change in restricted cash and bank time deposits, including long-term portion (36,537 ) 5,707
Other investing activities, net (81 ) 158  
Net cash used in investing activities (659,208 ) (106,353 )
 
Cash flows from financing activities:
Proceeds from borrowings, net of original issuance discounts 1,526,750 646,750
Repayments of borrowings and other financing obligations (1,361,708 ) (582,263 )
Proceeds from public issuance of common stock 274,563
Proceeds from issuance of warrants 45,188
Payments for convertible note hedges (60,800 )
Payments of equity issuance, debt issuance and other debt-related costs (27,713 ) (7,754 )
Proceeds from exercises of stock options 8,585 2,649
Purchases of treasury stock (2,238 )
Cash received in CTI Merger 10,370
Payments of contingent consideration for business combinations (financing portion) (6,026 ) (15,373 )
Net cash provided by financing activities 396,601   54,379  
Effect of exchange rate changes on cash and cash equivalents 285   (1,473 )
Net (decrease) increase in cash and cash equivalents (191,949 ) 19,211
Cash and cash equivalents, beginning of period 378,618   209,973  
Cash and cash equivalents, end of period $ 186,669   $ 229,184  
 

Verint Systems Inc. and Subsidiaries
Supplemental Information About Non-GAAP Financial Measures

This press release contains non-GAAP financial measures. Tables 2 and 3 include a reconciliation of each non-GAAP financial measure for completed periods presented in this press release to the most directly comparable GAAP financial measure. Non-GAAP financial measures should not be considered in isolation or as a substitute for comparable GAAP financial measures. The non-GAAP financial measures we present have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP, and these non-GAAP financial measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP financial measures. These non-GAAP financial measures do not represent discretionary cash available to us to invest in the growth of our business, and we may in the future incur expenses similar to or in addition to the adjustments made in these non-GAAP financial measures.

We believe that the non-GAAP financial measures we present provide meaningful supplemental information regarding our operating results primarily because they exclude certain non-cash charges or items that we do not believe are reflective of our ongoing operating results when budgeting, planning and forecasting, determining compensation, and when assessing the performance of our business with our individual operating segments or our senior management. We believe that these non-GAAP financial measures also facilitate the comparison by management and investors of results between periods and among our peer companies. However, those companies may calculate similar non-GAAP financial measures differently than we do, limiting their usefulness as comparative measures.

Adjustments to Non-GAAP Financial Measures

Revenue adjustments related to acquisitions. We exclude from our non-GAAP revenue the impact of fair value adjustments required under GAAP relating to acquired customer support contracts which would have otherwise been recognized on a standalone basis. We exclude these adjustments from our non-GAAP financial measures because these are not reflective of our ongoing operations.

Amortization of acquired intangible assets, including acquired technology and backlog. When we acquire an entity, we are required under GAAP to record the fair values of the intangible assets of the acquired entity and amortize those assets over their useful lives. We exclude the amortization of acquired intangible assets, including acquired technology and backlog, from our non-GAAP financial measures. These expenses are excluded from our non-GAAP financial measures because they are non-cash charges. In addition, these amounts are inconsistent in amount and frequency and are significantly impacted by the timing and size of acquisitions. Thus, we also exclude these amounts to provide better comparability of pre- and post-acquisition operating results.

Stock-based compensation expenses. We exclude stock-based compensation expenses related to stock options, restricted stock awards and units, stock bonus plans and phantom stock from our non-GAAP financial measures. These expenses are excluded from our non-GAAP financial measures because they are primarily non-cash charges.

M&A and other adjustments. We exclude from our non-GAAP financial measures legal, other professional fees and certain other expenses associated with acquisitions, whether or not consummated, and certain extraordinary transactions, including reorganizations and restructurings. Also excluded are changes in the fair value of contingent consideration liabilities associated with business combinations. These expenses are excluded from our non-GAAP financial measures because we believe that they are not reflective of our ongoing operations.

Unrealized (gains) losses on derivatives, net. We exclude from our non-GAAP financial measures unrealized gains and losses on foreign currency derivatives not designated as hedges. These gains and losses are excluded from our non-GAAP financial measures because they are non-cash transactions which are highly variable from period to period and which we believe are not reflective of our ongoing operations.

Losses on early retirements of debt. We exclude from our non-GAAP financial measures losses on early retirements of debt attributable to refinancing or repaying our debt because we believe it is not reflective of our ongoing operations.

Amortization of convertible note discount. Under GAAP, certain convertible debt instruments that may be settled in cash upon conversion are required to be bifurcated into separate liability (debt) and equity (conversion option) components in a manner that reflects the issuer’s non-convertible debt borrowing rate. As a result, for GAAP purposes, we are required to recognize imputed interest expense in amounts significantly in excess of the coupon rate on our $400.0 million of 1.50% convertible notes. The difference between the imputed interest expense and the coupon interest expense is excluded from our non-GAAP financial measures because we believe that this non-cash expense is not reflective of ongoing operations.

Non-cash tax adjustments. We exclude from our non-GAAP financial measures non-cash tax adjustments, which represent the difference between the amount of taxes we expect to pay related to current year income, and our GAAP tax provision on an annual basis. On a quarterly basis, this adjustment reflects our expected annual effective tax rate on a cash basis.

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