UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the fiscal year ended September 30,
2007
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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 Number: 000-29357
CHORDIANT
SOFTWARE, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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93-1051328
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(State
or other jurisdiction of
incorporation
or organization)
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(IRS
Employer
identification
No.)
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20400
Stevens Creek Blvd., Suite 400
Cupertino,
California 95014
(Address
of principal executive offices, including zip code)
(408)
517-6100
(Registrant’s
telephone number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock $.001 Par Value per Share
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The
NASDAQ Stock Market LLC
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(NASDAQ
Global Market)
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Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities
Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the
Act. Yes ¨ No x
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 x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Transition Report on Form 10-K
or
any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer ¨
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Accelerated
filer x
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Non-accelerated
filer ¨
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Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes ¨ No x
State
the aggregate market value of the voting and non-voting common equity held
by
non-affiliates computed by reference to the price at which the common equity
was
last sold, or the average bid and asked price of such common equity, as of
March
31, 2007, the last business day of the registrant’s most recently completed
second fiscal quarter: $327,939,833.
As
of October 31, 2007, there were 33,289,780 shares of the registrant’s common
stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Part
III-Portions of the registrant’s definitive proxy statement to be issued in
conjunction with registrant’s 2008 Annual Stockholder’s
meeting.
ANNUAL
REPORT ON FORM 10-K
INDEX
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Item
1
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3
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Item
1A.
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12
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Item
1B.
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21
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Item
2.
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21
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Item
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Item
6.
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Item
7.
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26
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Item
7A.
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48
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Item
8.
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49
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Item
9.
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82
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Item
9A.
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82
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Item
9B.
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84
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Item
10.
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84
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Item
11.
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84
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Item
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84
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Item
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84
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Item
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84
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Item
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85
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92
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FORWARD-LOOKING
INFORMATION
Except
for the historical information contained herein, this Annual Report contains
certain information that is forward-looking in nature. This information is
based
on our current expectations, assumptions, estimates and projections about
our
business and our industry, and involves known and unknown risks, uncertainties
and other factors that may cause our or our industry’s results, levels of
activity, performance or achievements to be materially different from any
future
results, levels of activity, performance or achievements expressed or implied
in, or contemplated by the forward-looking statements. Words such as “believe,”
“anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “should,” “estimate,”
“predict,” “guidance,” “potential,” “continue” or the negative of such terms or
other similar expressions identify forward-looking statements. In addition,
any
statements that refer to expectations, projections or other characterizations
of
future events or circumstances are forward-looking statements. Our actual
results could differ materially from those anticipated in such forward-looking
statements as a result of several factors more fully described under the
caption
“Risk Factors” and those discussed elsewhere in this document. These and many
other factors could affect the future financial and operating results of
Chordiant. Chordiant undertakes no obligation to update any forward-looking
statement to reflect events after the date of this report. All references
to
“Chordiant”, “we”, “us”, or “the Company” means Chordiant Software, Inc. and its
subsidiaries except where it’s made clear that the term means only the parent
company.
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BUSINESS
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Chordiant
is an enterprise software company that delivers products and services that
improve the “customer experience” in front-office processes for leading global
companies primarily in the banking, insurance, healthcare, and
telecommunications markets. Chordiant provides companies in these markets with
innovative solutions that help them more effectively manage their customer
interactions, offering “next best offers” for those customers based on pre-built
business rules.
Our
enterprise-scale software utilizes predictive decisioning, analytical modeling,
and strategy formulation in real-time for decision management and execution
at
the point of sale. This capability enables organizations to improve the accuracy
of marketing offers for retention, up-selling, cross selling, and modeling
risk
scenarios such as customer churn and the likelihood of default on
payments.
We
believe our solutions add business value and return-on-investment for our
customers by reducing operational costs, and increasing employee productivity.
These improvements are realized by automating key business processes and
supporting organizational decision-making associated with the servicing,
selling, marketing and fulfillment of customer requests across the enterprise.
We offer solutions to our clients that include software applications, business
processes, tools and services that will integrate their customer information
and
corporate systems to produce a real-time view of customers across multiple
business channels. Our solutions offer businesses additional flexibility
to
create and set their policies and processes to control the quality of servicing,
fulfillment and marketing offers to their customers.
On
December 21, 2004, we acquired KiQ Limited, a privately held United Kingdom
software company or KiQ, for an aggregate purchase price of approximately
$20
million, which was comprised of $9.7 million in cash, $9.4 million in our
common
stock and approximately $0.9 million in associated transaction costs. Through
this transaction, we acquired a decision management system that advances
the
state of analytics by exploiting the power of predictive data mining, analytical
modeling, and strategy formulation into real-time decision management and
execution. Products and patented technology acquired by us in this transaction
enable organizations to significantly increase the accuracy of marketing
offers
for retention, up-selling, cross selling, and to model risk scenarios such
as
customer churn and likelihood to default on payments. With the addition of
KiQ’s
products and patented technology we are able to deliver a range of applications
for real-time recommendation, retention, risk management and
recruitment.
Product
Solutions
Our
products are designed for global enterprises seeking to optimize their customer
experiences through effective decision analysis, marketing, selling and
servicing efforts. We have designed our products to integrate customer
information from different data sources and systems of record, automate business
processes based on a customer’s specific profile and requests, and provide
uniform service and information to customers across multiple communication
channels. Our products are designed to enable companies to deliver appropriate
recommendations (also known as “next best action”), services, offers and
information to a targeted customer at the time of customer need while complying
with relevant business policy and industry regulatory requirements.
Our
solutions are designed to address the enterprise requirements of global consumer
companies serving millions of customers across multiple business channels
integrating multiple lines of business. The solution suite is typically licensed
as an integrated set of software products that include one or more vertical
market applications running on top of a common layer of
foundational
technology and supporting tools. Chordiant’s software is based on open systems
software standards that are widely adopted by our industry and capable of
deployment throughout an enterprise’s information technology infrastructure.
Chordiant software is built to be highly scalable and adaptable to a customer’s
specific business requirements or technology infrastructure.
Products
and Solutions
Historically,
our products have been categorized into three general groups: Enterprise
solutions (including the “Cx” Enterprise Foundation and Call Center and Customer
Service Desktop products), Decision Management products, and the Marketing
Director Suite of products. Our solutions are designed to address a variety
of
business needs within our four target vertical markets of banking, insurance,
healthcare, and telecommunications:
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·
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Call
Center and Customer Service Desktop (Call Center Advisor – Browser
Edition): This product is a browser-based guided desktop for the
effective management of customer contacts, service requests, and
customer
case history in the call center channel. The desktop is integrated
with
leading computer telephony integration products, working with our
own
queue-based work management to deliver ‘universal queues’ to the
enterprise. This product is used by customer services professionals
across
all our target markets. It is designed to meet the high volume
transaction
and business processes common in enterprise contact centers. The
desktop
also acts as a delivery channel for our decision management and
marketing
products together with the other business applications that Chordiant
offers.
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·
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Marketing
Director: We provide applications for driving unified,
personalized marketing campaigns and response management across
multiple
media types and multiple channels including email, web, phone,
and mobile
messaging (MMS/SMS). These products are used by marketing professionals
across all our target markets to segment and target prospects and
customers and deliver to them effective marketing campaigns. The
Marketing
Director suite of products integrates with our Decision Management
products to provide an integrated campaign management
system.
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·
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Recommendation
Advisor: An application which provides flexible lead collection
and routing in a common guided selling desktop, integrated with
marketing
campaigns and product fulfillment. Predictive and adaptive analytics
guide
staff toward best offers and “next best action” in the context of inbound
or outbound customer interactions. This product is used by sales
and
service professionals across our target markets to manage leads
and
deliver highly effective sales
messages.
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·
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Credit
Card Disputes, Chargebacks and Fraud: These modular applications
are designed to automate and optimize customer and mid-office functions
associated with credit card dispute handling and fraud investigation
and
recovery. The products use Chordiant technology to implement the
dispute
and chargeback regulatory requirements of credit card associations
to
assist organizations in managing their compliance of these complex
regulations. This application is used by customer service professionals
in
the credit card segment of banking to drive more cost effective,
compliant
handling of disputes and fraud
cases.
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·
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Teller:
A guided desktop product and supporting financial transaction components
for retail bank tellers/cashiers or other cash-based desktop applications.
This product is used in the banking and lending sectors by customer-facing
staff in bank branches or stores to effectively process cash and
related
financial transactions on behalf of the customer. The solution
utilizes
the “Cx” (Customer Experience) Enterprise Foundation (described below) in
providing company-wide case management, customer history, and work
management between front office and back office
operations.
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Lending:
Solutions and services which provide a common process-driven
lending infrastructure across an organization to increase efficiency
of
loan originations, quoting, account opening and loan risk assessment
and
management such as required by Basel II. Our lending solutions
are used in
banking and lending by a variety of users and desktop
applications.
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·
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Insurance:
Solutions and services which provide a common process-driven insurance
infrastructure and services across an organization to increase
efficiency
of case management, claims processing, quoting, and risk management.
Our
insurance solutions and services are used in the insurance sector
by a
variety of users and desktop
applications.
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·
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Collections:
This product is designed to deliver automation and operational
efficiency
to debt recovery and collections professionals. The first generally
available release, consisting of core collections functions, was
shipped
in the third fiscal quarter of 2007. The product is designed to
make
extensive use of Chordiant’s Decision Management (CDM) technology to
deliver real-time decisioning.
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Technology
Chordiant
applications share a common technology platform and set of development and
configuration tools through our Cx Enterprise Foundation. Chordiant technology
is built to scale to tens of thousands of users and integrate seamlessly
into
our customer’s IT infrastructure. Chordiant technology is generally built based
on standards as defined in Java 2 Enterprise Edition (J2EE). Chordiant
technology works alongside third party J2EE Application Servers, such as
those
from International Business Machines Corporation (IBM) and BEA Systems
Inc.
Chordiant
technology is based on Service Oriented Architecture (SOA). This architecture
provides a framework for large or growing businesses to provide multi-channel
interaction and process orchestration across multiple lines of business.
The Cx
Enterprise Foundation framework provides a pre-integrated environment that
supports the business applications required by these large scale
organizations. With predictive decisioning built-in, organizations
can utilize Chordiant technology to obtain customer behavioral insight and
use
this to drive the most appropriate business processes, guide staff through
the
best tasks to increase responsiveness, reduce errors, shorten cycle times,
and
present the most relevant offers to customers in each interaction.
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·
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Cx
Enterprise Foundation: Foundation Server, Café, and Tools
Platform: Consisting of a family of products with enterprise-wide
process orchestration and case management at its core, the Chordiant
Cx
Enterprise Foundation product family provides a common, highly
scalable
base platform for all Chordiant solutions. The product family incorporates
industry standards such as J2EE, model driven development, AJAX
high
performance thin client desktops, Java Server Faces (JSF), and
enterprise
open source technologies including Hibernate, and Apache Trinidad.
The
products are supported by process development and administration
tools
that use the Eclipse integrated development
environment.
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The
Enterprise Platform incorporates module ‘servers’ to deliver additional
functionality as needed including business rules, decision management, telephony
integration, connectivity to systems of record and interaction channel
management. These allow organizations to implement only those functions that
are
required for their particular business requirement without interfering with
future project requirements.
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·
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Decisioning:
Consisting of flexible products and tools for adaptive decisioning,
predictive decisioning, and rules, our Chordiant Decision Management
(CDM)
product family allows organizations to effectively drive application
behavior based on industry or organizational models and logic.
This
capability allows business users advanced control over business
priorities, and enables the business to refine offer and service
management in real-time. CDM is a suite of products and
comprises:
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•
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Chordiant
Data Preparation Director—Chordiant Data Preparation Director allows
non-IT users to combine, manipulate and aggregate customer data
using an
easy to use visual interface.
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•
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Chordiant
Predictive Analytics Director—Chordiant Predictive Analytics Director
provides marketing professionals functionality which enables in-depth
analysis of significant amounts of customer information using data-mining
and predictive analytical
capabilities.
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•
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Chordiant
Strategy Director—Chordiant Strategy Director allows users to design
customer interaction strategies and marketing offers based on decisions
and rules that reflect customer behavior, preferences, legislation,
corporate policies and desired business outcomes. The resulting
decision logic is executed in our campaign management solution
for
outbound communication or executed in real-time in multiple channels
of
communication.
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•
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Chordiant
Decision Monitor—Chordiant Decision Monitor provides management with
insight into business results, measures data analysis effectiveness,
and
allows an organization to learn from current and future data models.
It is
a software module in which decisions are automatically logged and
stored
in a monitoring database together with the relevant data as well
as
subsequent customer information and behavior. This module can be
integrated and analyzed by third party business intelligence
tools.
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•
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Chordiant
Deployment Manager—Chordiant Deployment Manager provides the
administrative function to prepare available data in the operational
environment and implement the decision logic into production campaigns,
business processes and
applications.
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•
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Chordiant
Real-Time Decisioning Services—Chordiant Real-Time Decisioning Server
generates a decisioning service that can be hosted in industry-standard
application servers.
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•
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Chordiant
Database Decisioning Services—The Chordiant Database Decisioning Server
provides an application for data mining, analysis, and modeling
to create
the optimal decision logic and the appropriate decisions
outcomes.
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Chordiant
Mesh Collaboration
Announced
in fiscal year 2006, Chordiant Mesh is a collaborative development network
where
customers, partners, and Chordiant staff can work together on solutions to
respond to customer initiatives. Chordiant Mesh is a development infrastructure
layer that allows organizations to collaborate on a wide variety of solutions,
components, and tools. By applying principles from open source projects to
a
member-driven high-end ecosystem, Chordiant Mesh facilitates far greater
collaboration, agility, speed to market, transparency, and quality than
customers are accustomed to receiving from traditional high-end enterprise
software providers.
Key
benefits of Chordiant Mesh are:
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·
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A
fabric for the maintenance of infrastructure level code and reduction
of
customization and cost of
ownership.
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·
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A
set of tools and methodologies for building applications collaboratively
with Chordiant and its partners.
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·
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Enables
and enhances the IT systems “grid” to better support high value SOA −
based applications.
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·
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Enhancement
of the ability of IT departments to provide support, control and
flexibility.
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·
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By
leveraging open-source development models, Chordiant can take code
revisions submitted by community members − customers, partners and
Chordiant itself − and allow these to be incorporated into its products
when appropriate.
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This
new Mesh development approach enables Chordiant to be in closer collaboration
with its enterprise customers.
Strategic
Direction
The
Company is focused on solving problems for our global accounts through helping
them improve the quality of the customer experience they deliver in the banking,
insurance, healthcare, and telecommunications markets. Chordiant anticipates
that it will increasingly deliver business-focused applications based on
an open
and adaptable core information technology, or IT, infrastructure that provides
high levels of business agility and fast return on investment for enterprises
by
allowing rapid changes to their IT systems. Within the markets above, Chordiant
will continue to develop domain-level solutions for these markets, focusing
on
the most mission-critical business processes facing our customers.
Customers
We
target global brand leaders in our core markets. Our customers include: ING,
Canada, Inc., HSBC Technology and Services (USA), Inc., Capital One Services,
Inc., O2 (UK) Limited, Time Warner Cable, Inc., Covad Communication Company,
21st Century Insurance, T-Mobile, Lloyds TSB Bank plc, Bank of Ireland Group,
The Royal Bank of Scotland plc, Metropolitan Life Insurance Company, Signal
Iduna, Deutsche Bank AG, Canadian Tire Financial Services, Canadian Imperial
Bank of Commerce, Halifax plc, British Telecommunications plc, Connecticut
General Life Insurance Company, Citibank Credit Services Inc. (USA), and
Sky
Subscribers Services Limited. As we deploy new applications, we anticipate
that
a certain percentage of these and new customers will adopt these new
applications and expand their investment in Chordiant products. For the year
ended September 30, 2007, Citicorp Credit Services Inc. and IBM accounted
for
23% and 16% of our total revenues, respectively.
Technology
Chordiant’s
solutions and core technology are implemented using industry standard software
that includes J2EE, XML, and Web Services. This industry standard set of
development specifications leverages the strengths of the Java programming
language to enable software applications that are easier to develop, configure
and integrate with legacy and third party information technology
systems.
Chordiant’s
architecture leverages J2EE and Web Services extensively to provide a services
oriented architecture for use by Chordiant applications and other systems.
The
business services and related business components use a data persistence
foundation with built-in support for Oracle and DB2 databases as well as
IBM
WebSphere MQ messaging. Generally, our software is easily integrated with
other
data sources, including those built on the Java Connector Architecture
(JCA).
Chordiant’s
web browser technology delivers consistent self-service and agent-driven
customer interaction processes using a rich web-based application platform
that
provides desktop interface behavior in a browser-based technology with high
performance, low maintenance costs, and flexibility to meet the differing
demands of a diverse user population.
Certain
of our products use technology modules from third party technology providers
including IBM, BEA Systems, Sun Microsystems, and certain other non-public
entities. Our enterprise platform solutions support industry standard J2EE
application servers including IBM WebSphere and BEA WebLogic. Our server
software runs on UNIX server platforms from Sun Microsystems, IBM and
Linux.
Sales
and Marketing
We
license our solutions and sell services primarily through a direct sales
organization that is complemented by selling and support efforts through
business alliance partners such as IBM, Tata Consulting, Cap Gemini,
BearingPoint, and Accenture, systems integrators and technology vendors.
Our
market focus is the business-to-consumer segment of the economy with a targeted
effort on leading consumer focused industries and companies using multiple
channels as the means of conducting business and serving customers.
The
sales process generally ranges from six to eighteen months depending on the
level of knowledge that prospective customers need about the use and benefits
of
our solutions and the involvement of systems integrators. During the sales
process, we typically approach the senior management teams of the business
and
information technology departments of a prospective customer’s organization. We
utilize sales teams consisting of sales and technical professionals who work
with our systems integration partners to create company specific proposals,
presentations and proof of concept demonstrations that address the needs
of the
business and its technology requirements.
Our
corporate offices are located in Cupertino, California, and we maintain an
applications development center in Bedford, New Hampshire. In Europe, we
have
offices in the greater metropolitan areas of London, Madrid, Amsterdam, and
Munich. We have sales and support personnel in various additional locations
in
North America and Europe.
Our
Services
We
offer a comprehensive set of customer services including professional consulting
services and product support and training services. We believe that providing
high quality customer service is critical to achieving rapid product
implementation and customer success.
Professional
Services
We
provide implementation consulting and customer support services to licensed
customers through our worldwide professional services organization. Our
professional services consulting teams often assist customers and systems
integrator partners in the configuration and implementation of our software
solutions.
Our
professional services organization deploys consultants as part of the project
team alongside systems integration partners and members of the customer’s
internal team to provide subject matter expertise, technical knowledge, business
engineering, project guidance and quality assessments during the entire solution
lifecycle. In the design stage, we provide a variety of professional services
that help determine a customer’s business processes and the technical
requirements of the solutions implementation. In the implementation stage,
we
use a delivery methodology to assist customers and integration partners in
planning and managing the implementation. Typically, systems integrators,
supported by our consultants, provide overall program management and coordinate
the implementation of our products with a customer’s existing communications,
applications, databases and transaction systems. In the final phases of an
implementation, the systems integrators provide deployment services to enable
a
customer’s internal team to implement the system, train internal users and
provide first-level end-user support.
Although
our primary strategy is to leverage our strategic systems integration partners
for implementations, our internal professional services organization is often
integral in implementing our enterprise platform software solutions for our
customers. We believe that our consulting services enhance the use and
administration of our software solutions, facilitate the implementation of
our
solutions and result in sharing best business practices with client and systems
integrator project teams. In addition to implementing our software, our
professional services organization works closely with our internal research
and
development organization to enhance existing software solutions.
In
addition to our internal professional services organization, in calendar
2007,
we renewed for one year our agreement with Ness Technologies Inc., Ness Global
Services, Inc. and Ness Technologies India, Ltd. (collectively,
“Ness”), that we originally entered into in 2003. Ness provides
Chordiant with resources focused on technical product support, sustaining
engineering product testing and product development through their global
technical resources and operations center in Bangalore, India. Ness is an
independent contracting company with global technical resources. The agreement
with Ness may be extended for additional one year terms at our
discretion. Our agreement with Ness enables them, at our direction,
to attract, train, assimilate and retain sufficient highly qualified personnel
to perform technical support and certain sustaining engineering
functions.
Educational
Services
We
provide educational services to train and enable our systems integrators
and
customers to use our products and technologies. We offer a comprehensive
series
of training modules to provide the knowledge and skills to successfully deploy,
use and maintain our products. These training courses focus on the technical
aspects of our products as well as business issues and processes. We provide
on-site customized training courses for a fee and, also, through classroom
and
lab instructions. In addition, we provide certification programs for our
partners and customers.
Customer
Support
We
provide our customers with unspecified support and maintenance services
including telephone support, web-based support and updates to our products
and
documentation. We believe that providing a high level of technical support
is
critical to customer satisfaction. We also offer training programs to our
customers and other companies with which we have relationships to accelerate
the
implementation and adoption of our solutions by the users within a company.
Fees
for our training services are typically charged separately from our software
license, maintenance and consulting fees.
Our
customers have a choice of support and maintenance options depending on the
level of service desired. Our technical support services are available to
clients by telephone, over the web, by email and on-site. Additionally, we
provide unspecified product enhancement releases to all customers as part
of our
support and maintenance contracts. We use a customer service automation system
to track each customer inquiry until it is resolved. We also make use of
our
website and a secured customer forum to provide product information and
technical support information worldwide 24 hours a day, seven days a
week.
Strategic
Partnerships
Establishing
partnerships and alliances with third parties that provide additional services
and resources for implementing our solutions to enhance our sales and service
organizations’ productivity is an important element of our strategy. These
relationships and alliances fall into the following categories:
Consulting
and System Integration Relationships. To enhance the productivity of our
sales and service organizations, we have established relationships with systems
integrators, complementary technology providers, and alternative service
providers. We have established relationships and trained professionals at
a
number of systems integrators including: Accenture, IBM Global Services,
Ness
Technologies, Tata Consultancy Services, Patni Telecom Solutions (UK), LTD,
and
Infogain Corporation. We plan to expand these relationships to increase our
capacity to license and implement our products. We believe that expanding
our
relationships with systems integrators and independent consulting firms will
enable us to gain a greater share of our target markets.
Technology
Partnerships. We make extensive use of industry platforms and embrace a
number of core technologies in our solution offerings. We have formed
partnerships with vendors of software and hardware technology platforms.
We
currently maintain technology relationships with vendors such as Avaya/Lucent,
Alcatel/Genesys, BEA Systems, Cisco Systems, IBM, Oracle, and Sun Microsystems.
Many of these companies voluntarily provide us with early releases of new
technology platforms, education related to those platforms and limited access
to
their technical resources to facilitate adoption of their
technology.
Product
Development
We
have made substantial investments in research and development through internal
development, acquisitions and technology licensing. Our product development
efforts are focused on extending our enterprise software solutions, application
components, industry specific processes and business process functionality,
and
continued integration of industry-specific transaction systems and services.
Our
product development organization is responsible for new software products,
product architecture, core technologies, product testing, quality assurance
and
enabling the compatibility of our products with third party hardware and
software platforms.
Our
product development resources are organized into a number of development
teams
including:
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Cx
Enterprise Platform, which includes Foundational Server, Tools,
and
Decision Management Products;
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Operations,
which includes Mesh, Fulfillment, Performance Labs, and Release
Management;
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Applications,
which includes our vertical and Marketing
Applications;
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Product
Test and Quality.
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Our
product development teams have experience in enterprise and distributed
computing, J2EE and object oriented development, data management, process
and
workflow engineering, transaction system interfaces, Internet and Web-Services
technologies. Our research and development expenditures were $27.5 million,
$25.9 million and $20.3 million for the years ended September 30, 2007,
2006, and 2005, respectively.
Competition
The
market for our products is competitive, rapidly evolving, and can be affected
by
new product introductions and other market activities of industry participants.
The competitive landscape is quickly evolving to address the need for
enterprise-wide
integration
of IT assets and the convergence of customer interaction applications,
back-office systems and business processes. The most significant competition
we
face is from customers’ internal development efforts, custom system integration,
as well as other software providers that offer integration and development
platforms.
Internal
Development
Many
of our customers and potential customers have in the past attempted to develop
customer service, call center, customer relationship management and new
front-office systems in-house or with the help of systems integrators. Internal
information technology departments have staffed projects to build their own
systems utilizing a variety of tools. In some cases, such internal development
projects have been successful in satisfying the needs of an organization.
The
cost of internal development and total cost-of-ownership have risen to become
a
primary concern of the business and management. We expect that internal
development will continue to be a significant source of
competition.
Custom
System Integration Projects
Another
source of competition results from systems integrators engaged to build a
custom
development application. The introduction of a systems integrator typically
increases the likelihood of success for the customer. The competitive factors
in
this area require that we demonstrate to the customer the cost savings and
advantages of configurable, upgradeable and commercially supported software
products developed by a dedicated professional software
organization.
We
frequently rely on system consulting and systems integration firms for
implementation and other global services, as well as recommendations of our
products during the evaluation stage of the purchase process. Many of these
third parties have similar and often more established relationships with
our
competitors. We cannot assure that these third parties, many of whom have
significantly greater resources than us, will not market software products
in
competition with us.
Application
Software Competitors
As
discussed, our primary competition is from internal development at our customers
and potential customers. However, other competitors include providers of
traditional, first-generation customer relationship management, enterprise
resources planning, call center, marketing automation software and sales
force
automation software. These vendors include, among others, companies such
as:
Oracle Corporation, SAP, Pegasystems, Inc., Unica Corporation, SSA Global
Technologies, Inc., Fidelity National Information Systems, Inc., S1 Corporation,
and Amdocs Limited.
Some
of these companies have longer operating histories, greater financial, marketing
and other resources, greater name recognition in other markets and a larger
base
of customers than we do. In addition, some companies have well-established
relationships with our current and potential customers. As a result, these
competitors may be able to devote greater resources to the development,
promotion and sale of their products than we can.
We
believe that we compete favorably in the industries we serve based on the
following competitive advantages: process-driven solutions for servicing
and
selling; real-time and transactional processes; real-time decision management
and vertical processes implemented in a multi-channel architecture. The
technology advantages include: Chordiant architecture providing an open services
oriented architecture providing for integration with multiple legacy systems,
third party applications and communication channels and advanced browser
based
application environment for high volume call center, mid-office and branch
operations.
There
is no one competitor, nor are there a small number of competitors that are
dominant in our market. There are many factors that may increase competition
in
the enterprise customer relationship management market, including (i) entry
of
new competitors, (ii) mergers and alliances among existing competitors, (iii)
consolidation in the software industry and (iv) technological changes or
changes
in the use of the Internet. Increased competition may result in price
reductions, reduced gross margins and loss of market share, any of which
could
materially and adversely affect our business, operating results and financial
condition. Continuing consolidation in the software industry during 2007
may indicate that we will face new competitors in the future. Within the
year Oracle announced the acquisitions of Agile Software, an enterprise
solutions software maker and Hyperion Software, a business performance software
maker. Also in 2007, IBM acquired Palisades, a provider of lending software
to
companies in the mortgage industry and SAP has made an offer to purchase
Business Objects. In 2006, IBM acquired Webify, a provider of middleware
to
companies primarily in the insurance industry. In January 2006, Oracle acquired
Siebel Systems, Inc., a maker of customer relationship management software
products and acquired Portal Software, a provider of billing and revenue
management solutions for the communications and media industry. Siebel Systems,
Inc. was a competitor of ours. In September 2005, IBM had acquired DWL, a
provider of middleware to companies in the banking, insurance, retail and
telecommunications industries. In 2005, Oracle acquired I-flex Solutions,
Ltd.,
a banking software maker headquartered in Mumbai, India. While we do not
believe
that Agile Software, Hyperion Software, Palisades, Webify, Portal Software,
DWL,
or I-flex Solutions have been significant competitors of Chordiant in the
past,
the acquisition of these companies by Oracle and IBM may indicate that we
will
face increased competition from significantly larger and more established
entities in the future.
We
cannot assure that we will be able to compete successfully against current
and
future competitors or that the competitive pressure faced by us will not
materially and adversely affect our business, operating results and financial
condition.
Intellectual
Property and Proprietary Rights
Our
success is in part dependent upon our ability to develop and protect proprietary
technology and intellectual proprietary rights. We rely primarily on a
combination of contractual provisions, confidentiality procedures, patents
pending, trade secrets, and copyright and trademark laws to protect our
intellectual property and proprietary rights.
We
license our products through non-exclusive license agreements that impose
restrictions on customers’ ability to utilize the software. In addition, we seek
to avoid disclosure of our trade secrets, including requiring employees,
customers and others with access to our proprietary information to execute
confidentiality agreements with us and restricting access to our source code.
We
also seek to protect our rights in our products, documentation and other
written
materials under trade secret and copyright laws. Due to rapid technological
change, we believe factors such as the technological and creative skills
of our
personnel, new product developments and enhancements to our existing products
are more important than the various legal protections of our technology to
establishing and maintaining a technology leadership position.
We
integrate third party software into our products. Costs associated with
integrated technology provided by third parties historically accounts for
approximately 2% to 5% of total license revenues. The third party software
may
not continue to be available on commercially reasonable terms or at all.
If we
cannot maintain licenses to key third party software, shipments of our products
could be delayed until equivalent software is developed or licensed and
integrated into our products. Moreover, although we are generally indemnified
against claims if technology licensed from third parties infringes the
intellectual property and proprietary rights of others, this indemnification
is
not always available for all types of intellectual property and proprietary
rights and in some cases the scope of this indemnification is limited. There
can
be no assurance that infringement or invalidity claims arising from the
incorporation of third party technology or claims for indemnification from
our
customers resulting from these claims will not be asserted or prosecuted
against
us. These claims, even if not meritorious, could result in the expenditure
of
significant financial and managerial resources, in addition to potential
product
redevelopment costs and delays.
Despite
our efforts to protect our proprietary rights, existing laws afford only
limited
protection. Attempts may be made to copy or reverse engineer aspects of our
products or to obtain and use information that we regard as proprietary.
There
can be no assurance that we will be able to protect our proprietary rights
against unauthorized third party copying or use. Use by others of our
proprietary rights could materially harm our business. Furthermore, policing
the
unauthorized use of our products is difficult and expensive litigation may
be
necessary in the future to enforce our intellectual property
rights.
Third
parties may claim, and have claimed, that we have infringed, or currently
infringe, their current or future products. We expect that software developers
will increasingly be subject to infringement claims as the number of products
in
different industry segments overlap. Any claims, with or without merit, can
be
time-consuming, result in costly litigation, prevent product shipment, cause
delays, or require us to enter into royalty or licensing agreements, any
of
which could harm our business. Patent litigation in particular has complex
technical issues and inherent uncertainties. If an infringement claim against
us
was successful and we could not obtain a license on acceptable terms, license
a
substitute technology or redesign to avoid infringement, our business could
be
harmed.
For
fiscal year 2007, Chordiant received 2 patents from the US Patent and Trademark
Office. The first patent was US Patent Number 7,178,109 for innovative
user interface design, first introduced in its family of browser-based
applications in 2003. The second was US Patent Number 7,194,380 covers the
Decision Management Suite.
Employees
As
of September 30, 2007, we employed 285 full time employees. Of that total,
85
were primarily engaged in product development, engineering or systems
engineering, 85 were engaged in sales and marketing, 58 were engaged in
professional services and 57 were engaged in operational, financial and
administrative functions.
None
of our employees are represented by a labor union and we have never experienced
a work stoppage. We believe that our relations with our employees are good.
We
believe our future success will depend in part on our continued ability to
recruit and retain highly skilled technical, sales, finance, management and
marketing personnel.
Financial
Information About Geographic Areas
For
a detailed description of our sales by geographic region, we incorporate
by
reference the information in Note 14 to our consolidated financial statements
contained in Item 8 of this Annual Report on Form 10-K. Although the Company’s
revenues are not considered seasonal, our international operations do experience
a slow down in the summer months and professional services provided on an
hourly
basis decline due to the holidays in the quarterly periods ended December
31.
For information relating to the risks attendant to our foreign operations,
we
incorporate by reference the information under the headings “—Risk Factors—If we
fail to adequately address the difficulties of managing our international
operations, our revenues and operating expenses will be adversely affected” and
“—Risk Factors—Fluctuations in the value of the U.S. Dollar relative to foreign
currencies could make our products less competitive in international markets
and
could adversely affect our operating results and cash flows.”
Backlog
For
a detailed discussion of backlog, we incorporate by reference the information
in
Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” under the heading Financial Trends.
Available
Information
We
were incorporated in California in March 1991 and were reincorporated in
Delaware in October 1997.
We
maintain a site on the world-wide web at www.chordiant.com; however, information
found on our website is not incorporated by reference into this Annual Report
on
Form 10-K. We make available free of charge on or through our website our
filings with the Securities and Exchange Commission, including our Annual
Report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act, as soon as reasonably practicable after
we
electronically file such material with, or furnish it to, the Securities
and
Exchange Commission.
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RISK
FACTORS
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The
matters relating to the Audit Committee of the Board’s review of our historical
stock option granting practices and the restatement of our consolidated
financial statements have required us to incur substantial expenses, have
resulted in litigation, and may result in additional
litigation.
On
July 24, 2006, the Company announced that the Audit Committee of the Company’s
Board of Directors, with the assistance of independent legal counsel, was
conducting a review of our stock option practices covering the time from
the
Company’s initial public offering in 2000 through June 2006. As described in
Note 3 “Restatement of Previously Issued Consolidated Financial Statements” in
Notes to Consolidated Financial Statements in the 2006 Form 10-K, the Audit
Committee reached a conclusion that incorrect measurement dates were used
for
financial accounting purposes for stock option grants in certain prior
periods.
As a result, the Company has recorded additional non-cash stock-based
compensation expense, and related tax effects, related to certain stock
option
grants, and the Company has restated certain previously filed financial
statements included in the 2006 Annual Report on Form 10-K.
This
review of our historical stock option granting practices has required us
to
incur substantial expenses for legal, accounting, tax and other professional
services, has diverted our management’s attention from our business, and any
litigation or future government enforcement actions could in the future
adversely affect our business, financial condition, results of operations
and
cash flows.
Our
historical stock option granting practices and the restatement of our prior
financial statements have exposed us to greater risks associated with litigation
proceedings. Several derivative complaints have been filed pertaining to
allegations relating to stock option grants. We cannot assure you that
these or
future similar complaints or any future litigation or regulatory action
will
result in the same conclusions reached by the Audit Committee. The conduct
and
resolution of these matters will be time consuming, expensive and distracting
from the conduct of our business.
We
contacted the SEC regarding the Audit Committee’s review and, in July 2006, the
SEC commenced an investigation into our historical stock option grant practices.
In November 2006, a representative of the Audit Committee and its informal
advisors met with the enforcement staff of the SEC and provided them with
a
report of the Audit Committee’s investigation and findings. In January 2007, the
enforcement staff of the SEC notified the Company that its investigation
had
been terminated and no enforcement action had been recommended to the
Commission.
The
findings of the Audit Committee’s review are more fully described in Note 3 to
the Consolidated Financial Statements and in Item 9A of the Annual Report
on
Form 10-K for the year ended September 30, 2006.
Prior
to 2007, we were not profitable and we may incur losses in the future, which
may
raise vendor viability concerns thereby making it more difficult to close
license transactions with new and existing customers.
While
the Company was profitable in the amount of $6.0 million for the year ended
September 30, 2007, we incurred losses of $16.0 million and $19.9 million
for
the years ended September 30, 2006 and 2005, respectively. As of September
30,
2007, we had an accumulated deficit of $226.9 million. We may incur losses
in
future periods and cannot be certain that we can generate sufficient revenues
to
maintain profitability. Continued losses may leave many customers reluctant
to
enter into new large value license transactions without some assurance that
we
will operate profitably. If we fail to enter into new large value license
transactions due to viability concerns, our revenues will decline, which
could
further adversely affect our operating results.
Because
a small number of customers account for a substantial portion of our revenues,
the loss of a significant customer could cause a substantial decline in our
revenues.
We
derive a significant portion of our license and service revenues from a limited
number of customers. The loss of a major customer could cause a decrease
in
revenues and net income. For the year ended September 30, 2007, Citicorp
Credit
Services, Inc. and International Business Machines (IBM) accounted for 23%
and
16% of our total revenue, respectively. While our customer concentration
has
fluctuated, we expect that a limited number of customers will continue to
account for a substantial portion of our revenues in any given period. As
a
result, if we lose a major customer, or if a contract is delayed or cancelled
or
we do not contract with new major customers, our revenues and net income
would
be adversely affected. In addition, customers that have accounted for
significant revenues in the past may not generate revenues in any future
period,
causing our failure to obtain new significant customers or additional orders
from existing customers to materially affect our operating results.
If
we fail to adequately address the difficulties of managing our international
operations, our revenues and operating expenses will be adversely
affected.
For
the year ended September 30, 2007, international revenues were $58.8 million
or
approximately 47% of our total revenues. While North American revenues have
increased recently as a percentage of our overall revenues, international
revenues will continue to represent a significant portion of our total revenues
in future periods. We have faced, and will continue to face, difficulties
in
managing international operations which include:
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Difficulties
in hiring qualified
local personnel;
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Seasonal
fluctuations in customer
orders;
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Longer
accounts receivable
collection cycles;
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Expenses
associated with
licensing products and servicing customers in foreign
markets;
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Economic
downturns and political
uncertainty in international
economies;
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Income
tax withholding issues in countries in which we do not have a physical
presence, resulting in non-recoverable tax
payments;
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Complex
transfer pricing arrangements between legal
entities;
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Doing
business and licensing our software to customers in countries with
weaker
intellectual property protection laws and enforcement capabilities;
and
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Difficulties
in commencing new operations in countries where the Company has
not
previously conducted business, including those associated with
tax laws,
employment laws, government regulation, product warranty laws and
adopting
to local customs and culture.
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Any
of these factors could have a significant impact on our ability to license
products on a competitive and timely basis and could adversely affect our
operating expenses and net income. Additionally, we closed our only French
office in fiscal year 2007. The absence of a business office in France may
harm
our ability to attract and retain customers in that country.
Our
known backlog of business may not result in revenue.
An
increasingly material portion of our revenues has been derived from large
orders, as major customers deployed our products. We define backlog as
contractual commitments by our customers through purchase orders or contracts.
Backlog is comprised of software license orders which have not been accepted
by
customers or have not otherwise met all of the required criteria for revenue
recognition, deferred revenue from customer support contracts, and deferred
consulting and education orders for services not yet completed or delivered.
Backlog is not necessarily indicative of revenues to be recognized in a
specified future period. There are many factors that would impact the Company’s
filling of backlog, such as the Company’s progress in completing projects for
its customers and Chordiant’s customers’ meeting anticipated schedules for
customer-dependent deliverables. The Company provides no assurances that
any
portion of its backlog will be filled during any fiscal year or at all or
that
its backlog will be recognized as revenues in any given period. In addition,
it
is possible that customers from whom we expect to derive revenue from backlog
will default and as a result we may not be able to recognize expected revenue
from backlog.
Fluctuations
in the value of the U.S. Dollar relative to foreign currencies could adversely
affect our operating results and cash flows.
A
significant portion of our sales and operating expenses result from transactions
outside of the United States, often in foreign currencies. These currencies
include the United Kingdom Pound Sterling, the Euro and the Canadian
Dollar. Our international sales comprised 47% of our total sales for the
year
ended September 30, 2007. Our international sales comprised 38% of our total
sales for the year ended September 30, 2006. Our future operating results
will
continue to be subject to fluctuations in foreign currency rates, especially
if
international sales grow as a percentage of our total sales, and we may be
adversely impacted by fluctuations in foreign currency rates in the future.
For
the year ended September 30, 2007, we had an unrealized foreign currency
transaction gain of approximately $0.6 million. See Item 7A for further
discussion about foreign currency risk.
Geopolitical
concerns could make the closing of license transactions with new and existing
customers difficult.
Our
revenues may decrease in fiscal year 2008 or beyond if we are unable to enter
into new large-scale license transactions with new and existing customers.
The
current state of world affairs and geopolitical concerns have left many
customers reluctant to enter into new large value license transactions without
some assurance that the economy both in the customer’s home country and
worldwide will have some economic and political stability. Geopolitical
instability will continue to make closing large license transactions difficult.
In addition, we cannot predict what effect the U.S. military presence overseas
or potential or actual political or military conflict have had or are continuing
to have on our existing and prospective customers’ decision-making process with
respect to licensing or implementing enterprise-level products such as ours.
Our
ability to enter into new large license transactions also directly affects
our
ability to create additional consulting services and post customer support
revenues, on which we also depend.
Competition
in our markets is intense and could reduce our sales and prevent us from
achieving profitability.
Increased
competition in our markets could result in price reductions for our products
and
services, reduced gross margins and loss of market share, any one of which
could
reduce our future revenues. The market for our products is intensely
competitive, evolving and subject to rapid technological change. Historically,
our primary competition has been from internal development, custom systems
integration projects and application software competitors. In particular,
we
compete with:
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Internal
information
technology departments: in-house
information technology
departments of potential customers have developed or may develop
systems
that provide some or all of the functionality of our products.
We expect
that internally developed application integration and process automation
efforts will continue to be a significant source of
competition.
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Custom
systems integration
projects: we
compete with large systems integrators who may develop custom solutions
for specific companies which may reduce the likelihood that they
would
purchase our products and
services.
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Point
application vendors: we compete with providers of stand-alone point
solutions for web-based customer relationship management and traditional
client/server-based, call-center service customer and sales-force
automation solution providers.
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In
addition, recent continuing consolidation in the software industry during
2007
may indicate that we will face new competitors in the future. Within the
year
Oracle announced the acquisitions of Agile Software, an enterprise solutions
software maker and Hyperion Software, a business performance software maker.
Also in 2007, IBM acquired Palisades, a provider of lending software to
companies in the mortgage industry and SAP has made an offer to purchase
Business Objects. In 2006, IBM acquired Webify, a provider of middleware
to
companies primarily in the insurance industry. In January 2006, Oracle acquired
Siebel Systems, Inc., a maker of customer relationship management software
products and acquired Portal Software, a provider of billing and revenue
management solutions for the communications and media industry. Siebel Systems,
Inc. was a competitor of ours. In September 2005, IBM had acquired DWL, a
provider of middleware to companies in the banking, insurance, retail and
telecommunications industries. In 2005, Oracle acquired I-flex Solutions,
Ltd.,
a banking software maker headquartered in Mumbai, India. While we do not
believe
that Agile Software, Hyperion Software, Palisades, Webify, Portal Software,
DWL,
or I-flex Solutions have been significant competitors of Chordiant in the
past,
the acquisition of these companies by Oracle and IBM may indicate that we
will
face increased competition from significantly larger and more established
entities in the future.
Many
of our competitors have greater resources and broader customer relationships
than we do. In addition, many of these competitors have extensive knowledge
of
our industry. Current and potential competitors have established, or may
establish, cooperative relationships among themselves or with third parties
to
offer a single solution and to increase the ability of their products to
address
customer needs.
We
may experience a shortfall in bookings, revenue, earnings, cash flow or
otherwise fail to meet public market expectations, which could materially
and
adversely affect our business and the market price of our common
stock.
Our
revenues and operating results may fluctuate significantly because of a number
of factors, many of which are outside of our control. Some of these factors
include:
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Size
and timing of individual
license transactions;
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Delay
or deferral of customer
implementations of our products and subsequent impact on
revenues;
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Lengthening
of our sales
cycle;
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Potential
deterioration
and changes in
domestic and foreign markets and
economies;
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Success
in expanding our global
services organization, direct sales force and indirect distribution
channels;
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Timing
of new product
introductions and product
enhancements;
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Appropriate
mix of products
licensed and services sold;
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Levels
of international
transactions;
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Activities
of and acquisitions by competitors;
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Product
and price competition;
and
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Our
ability to develop and market
new products and control
costs.
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One
or more of the foregoing factors may cause our operating expenses to be
disproportionately high during any given period or may cause our revenues
and
operating results to fluctuate significantly. Based upon the preceding factors,
we may experience a shortfall in revenues and earnings or otherwise fail
to meet
public market expectations, which could materially and adversely affect our
business, financial condition, results of operations and the market price
of our
common stock.
Our
operating results and cash flows fluctuate significantly and delays in delivery
or implementation of our products or changes in the payment terms with customers
may cause unanticipated declines in revenues or cash flow, which could
disappoint investors and result in a decline in our stock
price.
Our
quarterly revenues depend primarily upon product implementation by our
customers. We have historically recognized a significant portion of our license
and services revenue through the percentage-of-completion method, using labor
hours incurred as the measure of progress towards completion of implementation
of our products and we expect this practice to continue. The percentage of
completion accounting method requires ongoing estimates of progress of
complicated and frequently changing technology projects. Documenting the
measure
of progress towards completion of implementation is subject to potential
errors
and changes in estimates. As a result, even minor errors or minor changes
in
estimates may lead to significant changes in accounting results which may
be
revised in later quarters due to subsequent information and events. Thus,
delays
or changes in customer business goals or direction when implementing our
software may adversely impact our quarterly revenue. Additionally, we may
increasingly enter into term, subscription or transaction based licensing
transactions that would cause us to recognize license revenue for such
transactions over a longer period of time than we have historically experienced
for our perpetual licenses. In addition, a significant portion of new customer
orders have been booked in the third month of each calendar quarter, with
many
of these bookings occurring in the last two weeks of the third month. We
expect
this trend to continue and, therefore, any failure or delay in bookings would
decrease our quarterly revenue and cash flows. The terms and conditions of
individual license agreements with customers vary from transaction to
transaction. Historically, the Company has been able to obtain prepayments
for
product in some cases. Other transactions link payment to the delivery or
acceptance of products. If we are unable to negotiate prepayments of fees
our
cash flows and financial ratios with respect to accounts receivable would
be
adversely impacted. If our revenues, operating margins or cash flows are
below
the expectations of the investment community, our stock price is likely to
decline.
If
we fail to maintain and expand our relationships with systems integrators
and
other business partners, our ability to develop, market, sell, and support
our
products may be adversely affected.
Our
development, marketing and distribution strategies rely on our ability to
form
and maintain long-term strategic relationships with systems integrators,
in
particular, our existing business alliance partners, IBM, and Accenture.
These
business relationships often consist of joint marketing programs, technology
partnerships and resale and distribution arrangements. Although most aspects
of
these relationships are contractual in nature, many important aspects of
these
relationships depend on the continued cooperation between the parties.
Divergence in strategy, change in focus, competitive product offerings or
potential contract defaults may interfere with our ability to develop, market,
sell, or support our products, which in turn could harm our business. If
either
IBM or Accenture were to terminate their agreements with us or our relationship
were to deteriorate, it could have a material adverse effect on our business,
financial condition and results of operations. In many cases, these parties
have
extensive relationships with our existing and potential customers and influence
the decisions of these customers. A number of our competitors have stronger
relationships with IBM and Accenture and, as a result, these systems integrators
may be more likely to recommend competitors’ products and services. In addition,
in September 2005, IBM had acquired DWL, a provider of middleware to companies
in the banking, insurance, retail and telecommunications industries. In 2006,
IBM acquired Webify, a
provider
of middleware to companies primarily in the insurance industry. In 2007,
IBM acquired Palisades, a provider of lending software to companies in the
mortgage industry and SAP has made an offer to purchase Business Objects.
While
we do not believe that either DWL, Webify, or Palisades had been a direct
competitor of Chordiant in the past, IBM’s acquisition of DWL, Webify, and
Palisades may indicate that IBM will become a competitor of ours in the future.
While the Company currently has a good relationship with IBM, this relationship
and the Company’s strategic relationship agreement with IBM may be harmed if the
Company increasingly finds itself competing with IBM. Our relationships with
systems integrators and their willingness to recommend our products to their
customers could be harmed if the Company were to be subject to a take over
attempt from a competitor of such systems integrators.
If
systems integrators fail to properly implement our software, our business,
reputation and financial results may be harmed.
We
are increasingly relying on systems integrators to implement our products,
and
this trend may continue. As a result, we have less quality control over the
implementation of our software with respect to these transactions and are
more
reliant on the ability of our systems integrators to correctly implement
our
software. If these systems integrators fail to properly implement our software,
our business, reputation and financial results may be harmed.
Our
primary products have a long sales and implementation cycle, which makes
it
difficult to predict our quarterly results and may cause our operating results
to vary significantly.
The
period between initial contact with a prospective customer and the
implementation of our products is unpredictable and often lengthy, ranging
from
approximately three to twenty-four months. Thus, revenue and cash receipts
could
vary significantly from quarter to quarter. Any delays in the implementation
of
our products could cause reductions in our revenues. The licensing of our
products is often an enterprise-wide decision that generally requires us
to
provide a significant level of education to prospective customers about the
use
and benefits of our products. The implementation of our products involves
significant commitment of technical and financial resources and is commonly
associated with substantial implementation efforts that may be performed
by us,
by the customer or by third party systems integrators. If we underestimate
the resources required to meet the expectations we have set with a customer
when
we set prices, then the timing of revenue could be impacted. If this happens
with a large customer engagement, then this could have a material adverse
effect
on our financial results. Customers generally consider a wide range of issues
before committing to purchase our products, including product benefits, ability
to operate with existing and future computer systems, vendor financial stability
and longevity, ability to accommodate increased transaction volume and product
reliability.
If
we do not maintain effective internal controls over financial reporting,
investors could lose confidence in our financial reporting and customers
may
delay purchasing decisions, which would harm our business and the market
price
of our common stock.
Effective
internal controls are necessary for us to provide reliable financial reports.
If
we cannot provide reliable financial reports, our business could be harmed.
We
are a complex company with complex accounting issues and thus subject to
related
risks of errors in financial reporting which may cause problems in corporate
governance, the costs of which may outweigh the costs of the underlying errors
themselves. For example, the Audit Committee of the Company’s Board of
Directors, with the assistance of outside legal counsel, conducted a review
of
our stock option practices covering the time from the Company’s initial public
offering in 2000 through September 2006. The Audit Committee reached a
conclusion that incorrect measurement dates were used for financial accounting
purposes for stock option grants in certain prior periods. As a result, the
Company has recorded additional non-cash stock-based compensation expense,
and
related tax effects, related to stock option grants and concluded that a
material weakness surrounding the control activities relating to the stock
option grants existed at September 30, 2006. To correct these
accounting errors, we restated the consolidated financial statements contained
in our Annual Report on Form 10-K for the year ended September 30, 2006 and
our
Quarterly Report on Form 10-Q for the three months ended June 30, 2006. As
a
result of this need to restate financial statements, management and the Audit
Committee determined that material weaknesses in our internal control over
financial reporting existed as of September 30, 2006. These material weaknesses
have contributed to increased expenses and efforts required for our financial
reporting.
If
we are not successful in implementing effective internal controls over financial
reporting, customers may delay purchasing decisions or we may lose customers,
create investor uncertainty, face litigation and the market price of our
common
stock may decline. For more information, please refer to the discussion under
the heading “Item 9A. Controls and Procedures” in the 2006 Annual Report on Form
10-K.
If
we are not able to successfully manage our partner operations in India, our
operations and financial results may be adversely
affected.
In
fiscal year 2003, we entered into an agreement with Ness Technologies Inc.,
Ness
USA Inc. (formerly Ness Global Services, Inc.) and Ness Technologies India,
Ltd.
(collectively, “Ness”), an independent contracting company with global technical
resources and an operations center in Bangalore, India and operations in
other
locations. The agreement provides for Ness, at our direction, to attract,
train,
assimilate and retain sufficient highly qualified personnel to perform staffing
for consulting projects, technical support, product test and certain sustaining
engineering functions. As of September 30, 2007, we use the services of
approximately 146 consultants through Ness. In addition, as a result of the
reduction in our workforce that took place in July 2005, and the reduction
in
our workforce that took place in October 2006, by approximately 10% in each
instance, we are now more dependent on Ness. The expansion of this agreement
is
an important component of our strategy to address the business needs of our
customers and manage our expenses. The success of this operation will depend
on
our ability and Ness’s ability to attract, train, assimilate and retain highly
qualified personnel in the required periods. A disruption of our relationship
with Ness could adversely affect our operations. Failure to effectively manage
the organization and operations will harm our business and financial
results.
If
our products do not operate effectively in a company-wide environment, we
may
lose sales and suffer decreased revenues.
If
existing customers have difficulty deploying our products or choose not to
fully
deploy our products, it could damage our reputation and reduce revenues.
Our
success requires that our products be highly scalable, and able to accommodate
substantial increases in the number of users. Our products are expected to
be
deployed on a variety of computer software and hardware platforms and to
be used
in connection with a number of third party software applications by
personnel who may not have previously used application software systems or
our
products. These deployments present very significant technical challenges,
which
are difficult or impossible to predict. If these deployments do not succeed,
we
may lose future sales opportunities and suffer decreased revenues. If we
underestimate the resources required to meet the expectations we have set
with a
customer when we set prices, then the timing of revenue could be impacted.
If
this happens with a large customer engagement then this could have a material
adverse effect on our financial results.
Defects
in our products could diminish demand for our products and result in decreased
revenues, decreased market acceptance and injury to our
reputation.
Errors
may be found from time-to-time in our new, acquired or enhanced products.
Any
significant software errors in our products may result in decreased revenues,
decreased sales, and injury to our reputation and/or increased warranty and
repair costs. Although we conduct extensive product testing during product
development, we have in the past discovered software errors in our products
as
well as in third party products, and as a result have experienced delays
in the
shipment of our new products.
Because
competition for qualified personnel is intense, we may not be able to retain
or
recruit personnel, which could impact the development and sales of our
products.
If
we are unable to hire or retain qualified personnel, or if newly hired personnel
fail to develop the necessary skills or fail to reach expected levels of
productivity, our ability to develop and market our products will be weakened.
Our success depends largely on the continued contributions of our key
management, finance, engineering, sales and marketing and professional services
personnel. In particular in prior years, we have had significant turnover
of our
executives as well in our sales, marketing and finance organizations and
many
key positions are held by people who have less than two years of experience
in
their roles with one Company. If these people are not well suited to their
new
roles, then this could result in the Company having problems in executing
its
strategy or in reporting its financial results. Because of the dependency
on a
small number of large deals, we are uniquely dependent upon the talents and
relationships of a few executives and have no guarantee of their retention.
Changes in key sales management could affect our ability to maintain existing
customer relationships or to close pending transactions. We have been targeted
by recruitment agencies seeking to hire our key management, finance,
engineering, sales and marketing and professional services personnel. In
addition, in July 2005 and again in October of 2006, we reduced the size
of our
workforce by approximately 10% in each instance, which may have a negative
effect on our ability to attract and retain qualified personnel.
To
date, our sales have been concentrated in the banking, insurance, healthcare,
and telecommunications markets, and if we are unable to continue sales in
these
markets or successfully penetrate new markets, or if these industries reduce
their spending in reaction to the difficulties in the subprime lending market,
our revenues may decline.
Sales
of our products and services in five large markets—banking, insurance,
healthcare, telecommunications and retail markets accounted for approximately
99% and 96 % of our total revenues for the year ended September 30, 2007
and 2006, respectively. We expect that revenues from these five markets will
continue to account for a substantial portion of our total revenues for the
foreseeable future. If we are unable to successfully increase penetration
of our
existing markets or achieve sales
in
additional markets, or if the overall economic climate of our target markets
deteriorates, our revenues may decline. Some of our current or prospective
customers, especially those in the banking and insurance industries are in
businesses that have or could have exposure, directly or indirectly, to the
residential mortgage sector or homebuilder sector which has recently been
facing
financial difficulties. If this causes our current or prospective
customers to reduce their spending on technology, then this could have an
adverse impact on our sales and revenues
Low
gross margin in services revenues could adversely impact our overall gross
margin and operating results.
Our
services revenues have had lower gross margins than our license revenues.
Service revenues comprised 57% and 58% of our total revenues for the year
ended
September 30, 2007 and 2006, respectively. Gross margin on service revenues
was
57% and 46% for the year ended September 30, 2007 and 2006, respectively.
License revenues comprised 43% and 42% of our total revenues for the years
ended
September 30, 2007 and 2006, respectively. Gross margins on license revenues
were 97% and 96% for the years ended September 30, 2007 and 2006,
respectively.
As
a result, an increase in the percentage of total revenues represented by
services revenues, or an unexpected decrease in license revenues, could have
a
detrimental impact on our overall gross margins. An increase to services
revenues would require us to expand our services organization, successfully
recruit and train a sufficient number of qualified services personnel, enter
into new implementation projects and obtain renewals of current maintenance
contracts by our customers. Such an expansion could further reduce gross
margins
in our services revenues.
We
may not have the workforce necessary to support our platform of products
if
demand for our products substantially increased, and, if we need to rebuild
our
workforce in the future, we may not be able to recruit personnel in a timely
manner, which could adversely impact the development and sales of our products
which would directly impact our operating results.
In
July 2005 and again in October of 2006, we reduced the size of our workforce
by
approximately 10% in each instance. In the event that demand for our products
increases, we may need to rebuild our workforce or increase outsourced functions
to companies based in foreign jurisdictions and we may be unable to hire,
train
or retain qualified personnel in a timely manner, which may weaken our ability
to market our products in a timely manner, adversely impacting our operations.
Our success depends largely on ensuring that we have adequate personnel to
support our platform of products as well as the continued contributions of
our
key management, finance, engineering, sales and marketing and professional
services personnel.
If
we fail to introduce new versions and releases of functional and scalable
products in a timely manner, customers may license competing products and
our
revenues may decline.
If
we are unable to ship or implement enhancements to our products when planned,
or
fail to achieve timely market acceptance of these enhancements, we may suffer
lost sales and could fail to achieve anticipated revenues. We have in the
past,
and expect in the future, to derive a significant portion of our total revenues
from the license of our primary product suite. Our future operating results
will
depend on the demand for the product suite by future customers, including
new
and enhanced releases that are subsequently introduced. If our competitors
release new products that are superior to our products in performance or
price,
or if we fail to enhance our products or introduce new features and
functionality in a timely manner, demand for our products may decline and
we may
not be able to recover our R&D expenditures from such products. We have in
the past experienced delays in the planned release dates of new versions
of our
software products and upgrades. New versions of our products may not be released
on schedule or may contain defects when released.
We
depend on technology licensed to us by third parties, and the loss or inability
to maintain these licenses could prevent or delay sales of our
products.
We
license from several software providers technologies that are incorporated
into
our products. We anticipate that we will continue to license technology from
third parties in the future. This software may not continue to be available
on
commercially reasonable terms, if at all. While currently we are not materially
dependent on any single third party for such licenses, the loss of the
technology licenses could result in delays in the license of our products
until
equivalent technology is developed or identified, licensed and integrated
into
our products. Even if substitute technologies are available, there can be
no
guarantee that we will be able to license these technologies on commercially
reasonable terms, if at all.
Defects
in third party products associated with our products could impair our products’
functionality and injure our reputation.
The
effective implementation of our products depends upon the successful operation
of third party products in conjunction with our products. Any undetected
defects
in these third party products could prevent the implementation or impair
the
functionality
of our products, delay new product introductions or injure our reputation.
In
the past, while our business has not been materially harmed, product releases
have been delayed as a result of errors in third party software and we have
incurred significant expenses fixing and investigating the cause of these
errors.
Our
customers and systems integration partners may have the ability to alter
our
source code and resulting inappropriate alterations could adversely affect
the
performance of our products, cause injury to our reputation and increase
operating expenses.
Customers
and systems integration partners may have access to the computer source code
for
certain elements of our products and may alter the source code. Alteration
of
our source code may lead to implementation, operation, technical support
and
upgrade problems for our customers. This could adversely affect the market
acceptance of our products, and any necessary investigative work and repairs
could cause us to incur significant expenses and delays in
implementation.
If
our products do not operate with the hardware and software platforms used
by our
customers, our customers may license competing products and our revenues
will
decline.
If
our products fail to satisfy advancing technological requirements of our
customers and potential customers, the market acceptance of these products
could
be reduced. We currently serve a customer base with a wide variety of constantly
changing hardware, software applications and networking platforms. Customer
acceptance of our products depends on many factors such as:
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Our
ability to integrate our
products with multiple platforms and existing or legacy systems;
and,
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Our
ability to anticipate and
support new standards, especially Internet and enterprise Java
standards.
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A
failure in our initial attempt to deploy our software through a Software
as a
Service (SaaS) model could cause injury to our reputation and impair our
ability
to develop, market and sell our products under a SaaS
model.
We
recently entered into a license with a third party that will allow that third
party to develop and host in their data centers, applications based on our
software to provide services to their customers, most of whom are in markets
that we do not currently penetrate. As we have no previous experience
in deploying our software in a SaaS model, a failure of this effort could
have a
detrimental effect to our ability to attract other third parties to use our
software in their SaaS businesses.
Our
failure to successfully integrate with future acquired or merged companies
and
technologies could prevent us from operating efficiently.
Our
business strategy includes pursuing opportunities to grow our business, both
through internal growth and through merger, acquisition and technology and
other
asset transactions. To implement this strategy, we may be involved in merger
and
acquisition activity and additional technology and asset purchase transactions.
Merger and acquisition transactions are motivated by many factors, including,
among others, our desire to grow our business, acquire skilled personnel,
obtain
new technologies and expand and enhance our product offerings. Growth through
mergers and acquisitions has several identifiable risks, including difficulties
associated with successfully integrating distinct businesses into new
organizations, the substantial management time devoted to integrating personnel,
technology and entire companies, the possibility that we might not be successful
in retaining the employees, undisclosed liabilities, the failure to realize
anticipated benefits (such as cost savings and synergies) and issues related
to
integrating acquired technology, merged/acquired companies or content into
our
products (such as unanticipated expenses). Realization of any of these risks
in
connection with any technology transaction or asset purchase we have entered
into, or may enter into, could have a material adverse effect on our business,
operating results, cash balances, and financial condition.
If
we become subject to intellectual property infringement claims, including
patent
infringement claims, these claims could be costly and time-consuming to defend,
divert management’s attention, cause product delays and have an adverse effect
on our revenues and net income.
We
expect that software product developers and providers of software in markets
similar to our target markets will increasingly be subject to infringement
claims as the number of products and competitors in our industry grows and
the
functionality of products overlap. Any claims, with or without merit, could
be
costly and time-consuming to defend, divert our management’s attention or cause
product delays. If any of our products were found to infringe a third party’s
proprietary rights, we could be required to enter into royalty or licensing
agreements to be able to sell our products. Royalty and licensing agreements,
if
required, may not be available on terms acceptable to us or at all.
In
particular, if we were sued for patent infringement by a patent holding company,
one which has acquired large numbers of patents solely for the purpose of
bringing suit against alleged infringers rather than practicing the patents,
it
may be costly to
defend
such a suit. We have received a letter from one such patent holding company
alleging that our products may infringe one or more of their
patents. If any of our products were found to infringe such patent,
the patent holder could seek an injunction to enjoin our use of the infringing
product. If we were not able to remove or replace the infringing portions
of
software with non-infringing software, and were no longer able to license
some
or all of our software products, such an injunction would have an extremely
detrimental effect on our business. If we were required to settle such claim,
it
could be extremely costly. A patent infringement claim could have a material
adverse effect on our business, operating results and financial
condition.
The
application of percentage of completion and completed contract accounting
to our
business is complex and may result in delays in the reporting of our financial
results and revenue not being recognized as we expect.
Although
we attempt to use standardized license agreements designed to meet current
revenue recognition criteria under generally accepted accounting principles,
we
must often negotiate and revise terms and conditions of these standardized
agreements, particularly in multi-product transactions. At the time of entering
into a transaction, we assess whether any services included within the
arrangement require us to perform significant implementation or customization
essential to the functionality of our products. For contracts involving
significant implementation or customization essential to the functionality
of
our products, we recognize the license and professional consulting services
revenues using the percentage-of-completion method using labor hours incurred
as
the measure of progress towards completion. The application of the percentage
of
completion method of accounting is complex and involves judgments and estimates,
which may change significantly based on customer requirements. This complexity
combined with changing customer requirements could result in delays in the
proper determination of our percentage of completion estimates and revenue
not
being recognized as we expect.
We
have also entered into co-development projects with our customers to jointly
develop new vertical applications, often over the course of a year or longer.
In
such cases we may only be able to recognize revenue upon delivery of the
new
application. The accounting treatment for these co-development projects could
result in delays in the recognition of revenue. The failure to successfully
complete these projects to the satisfaction of the customer could have a
material adverse effect on our business, operating results and financial
condition.
Changes
in our revenue recognition model could result in short term declines to
revenue.
Historically,
a high percentage of license revenues have been accounted for on the percentage
of completion method of accounting or recognized as revenue upon the delivery
of
product. If we were to enter into new types of transactions accounted for
on a
subscription or term basis, revenues might be recognized over a longer period
of
time. The impact of this change would make revenue recognition more predictable
over the long term, but it might also result in a short term reduction of
revenue as the new transactions took effect.
We
may identify material weaknesses relating to internal control over financial
reporting in the future, which may result in additional expenses and diversion
of management’s time as a result of performing future system and process
evaluation, testing and remediation required to comply with future management
assessment and auditor attestation requirements.
In
connection with the Company’s compliance with Section 404 under SOX for the
fiscal years ended September 30, 2006 and 2005, we identified certain
material weaknesses. In future periods, we will continue to document our
internal controls to allow management to report on, and our independent
registered public accounting firm to attest to, our internal control, over
financial reporting as required by Section 404 of SOX, within the time
frame required by Section 404. In the future, we may incur additional
expenses and diversion of management’s time as a result of performing the system
and process evaluation, testing and remediation required to comply with
management’s assessment and auditor attestation requirements. If we are not able
to timely comply with the requirements set forth in Section 404 in future
periods, we might be subject to sanctions or investigation by the regulatory
authorities. Any such action could adversely affect our business or financial
results.
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UNRESOLVED
STAFF
COMMENTS
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None.
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PROPERTIES
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Our
headquarters are located in offices that are approximately 25,000 square
feet in
Cupertino, California pursuant to an office lease expiring in December 2008.
We
also lease office space in Mahwah, New Jersey and Bedford, New Hampshire.
Outside of the United States, we have offices in the greater metropolitan
areas
of London, Madrid, Amsterdam, and Munich. We believe our existing facilities
meet our current needs and that we will be able to obtain additional commercial
space as needed.
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LEGAL
PROCEEDINGS
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Beginning
in July 2001, the Company and certain of our officers and directors, or
Individuals, were named as defendants in a series of class action stockholder
complaints filed in the United States District Court for the Southern District
of New York, now consolidated under the caption, “In re Chordiant Software, Inc.
Initial Public Offering Securities Litigation, Case No. 01-CV-6222”. In the
amended complaint, filed in April 2002, the plaintiffs allege that the Company,
the Individuals, and the underwriters of our initial public offering, or
IPO,
violated section 11 of the Securities Act of 1933 and section 10(b) of the
Exchange Act of 1934 based on allegations that our registration statement
and
prospectus failed to disclose material facts regarding the compensation to
be
received by, and the stock allocation practices of, our IPO underwriters.
The
complaint also contains claims against the Individuals for control person
liability under Securities Act section 15 and Exchange Act section 20. The
plaintiffs seek unspecified monetary damages and other relief. Similar
complaints were filed in the same court against hundreds of other public
companies, or Issuers, that conducted IPO’s of their common stock in the
late 1990’s or in the year 2000 (collectively, the “IPO Lawsuits”).
In
August 2001, all of the IPO Lawsuits were consolidated for pretrial purposes
before United States Judge Shira Scheindlin of the Southern District of New
York. In July 2002, the Company joined in a global motion to dismiss the
IPO Lawsuits filed by all of the Issuers (among others). In October 2002,
the Court entered an order dismissing the Individuals from the IPO Lawsuits
without prejudice, pursuant to an agreement tolling the statute of limitations
with respect to the Individuals. In February 2003, the court issued a decision
denying the motion to dismiss against Chordiant and many of the other
Issuers.
In
June 2003, Issuers and plaintiffs reached a tentative settlement agreement
that
would, among other things, result in the dismissal with prejudice of all
claims
against the Issuers and Individuals in the IPO Lawsuits, and the assignment
to
plaintiffs of certain potential claims that the Issuers may have against
the
underwriters. The tentative settlement also provides that, in the event that
plaintiffs ultimately recover less than a guaranteed sum of $1 billion from
the
IPO underwriters, plaintiffs would be entitled to payment by each participating
Issuer’s insurer of a pro rata share of any shortfall in the plaintiffs’
guaranteed recovery. In September 2003, in connection with the possible
settlement, those Individuals who had entered tolling agreements with plaintiffs
(described above) agreed to extend those agreements so that they would not
expire prior to any settlement being finalized. In June 2004, Chordiant and
almost all of the other Issuers entered into a formal settlement agreement
with
the plaintiffs. On February 15, 2005, the Court issued a decision
certifying a class action for settlement purposes, and granting preliminary
approval of the settlement subject to modification of certain bar orders
contemplated by the settlement. On August 31, 2005, the Court reaffirmed
class
certification and preliminary approval of the modified settlement in a
comprehensive Order, and directed that Notice of the settlement be published
and
mailed to class members beginning November 15, 2005. On February 24, 2006,
the
Court dismissed litigation filed against certain underwriters in connection
with
the claims to be assigned to the plaintiffs under the settlement. On April
24,
2006, the Court held a Final Fairness Hearing to determine whether to grant
final approval of the settlement. On December 5, 2006, the Second Circuit
Court
of Appeals vacated the lower Court's earlier decision certifying as class
actions the six IPO Lawsuits designated as "focus cases." Thereafter, the
District Court ordered a stay of all proceedings in all of the IPO Lawsuits
pending the outcome of plaintiffs’ petition to the Second Circuit for rehearing
en banc and resolution of the class certification issue. On April 6, 2007,
the
Second Circuit denied plaintiffs’ rehearing petition, holding that the actions
could not be maintained as pled but clarifying that the plaintiffs may seek
to
certify a more limited class in the District Court. Accordingly, the settlement
as originally negotiated will not be finally approved. Plaintiffs had until
July
31, 2007 in which to file amended complaints against all Issuers, including
Chordiant.
Plaintiffs
filed amended complaints in
the six focus cases on or about August 14, 2007. In September 2007, the
Company's named officers and directors again extended the tolling agreement
with
plaintiffs. On or about September 27, 2007, plaintiffs moved to certify
the classes alleged in the focus cases and to appoint class representatives
and
class counsel in those cases. On or about November 13, 2007, Issuers
in the focus cases filed a motion to dismiss the claims alleged
against them in the amended complaints. This action may divert the
efforts and attention of our management and, if determined adversely to us,
could have a material impact on our business, results of operations, financial
condition or cash flows.
On
August 1, 2006, a stockholder derivative complaint was filed in the United
States District Court for the Northern District of California by Jesse Brown
under the caption Brown v. Kelly, et al. Case No. C06-04671 JW (N.D. Cal.).
On
September 13, 2006, a second stockholder derivative complaint was filed in
the
United States District Court for the Northern District of California by Louis
Suba under the caption Suba v. Kelly et al., Case No. C06-05603 JW (N.D.
Cal.).
Both complaints were brought purportedly on behalf of the Company against
certain current and former officers and directors. On November 27, 2006,
the
court entered an order consolidating these actions
and requiring the plaintiffs to file a consolidated complaint. The
consolidated complaint was filed on January 11, 2007. The consolidated complaint
alleges, among other things, that the named officers and directors: (a) breached
their fiduciary duties as they colluded with each other to backdate stock
options, (b) violated section 10(b), 14(a) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder through their alleged actions,
and (c) were unjustly enriched by their receipt and retention of such stock
options. On May 21, 2007, the Company filed a motion to dismiss the entire
action on the grounds that the plaintiffs failed to take the steps necessary
to
bring a derivative action. The individual defendants filed motions to dismiss
as
well. The parties have agreed that the plaintiffs' opposition to the motions
to
dismiss would not be due until October 25, 2007, in order to permit
the parties an opportunity to explore a resolution of this dispute. The hearing
on the motion to dismiss is set for November 26, 2007. The Plaintiffs
have recently informed Chordiant that they intend to file an amended derivative
complaint. This will render the currently filed motion to dismiss moot and
a new motion to dismiss will have to be filed in response to the amended
pleading. The parties have stipulated to a schedule
for filing the amended complaint and for briefing motions to dismiss,
but the court has not yet entered this stipulation as an
order.
In
September 2006, the Company received a letter from Acacia Technologies Group,
a
patent holding company, suggesting that the Company may be infringing on
two
patents, designated by United States Patent Numbers 5,537,590 and 5,701,400,
which are held by one of their patent licensing and enforcement
subsidiaries. The Company is currently reviewing the validity of
these patents and whether the Company’s products may infringe upon
them. The Company has not formed a view of whether the Company may
have liability for infringement of these patents. Any related claims, whether
or
not they have merit, could be costly and time-consuming to defend, divert
our
management’s attention or cause product delays. If any of our products were
found to infringe such patents, the patent holder could seek an injunction
to
enjoin our use of the infringing product. If the Company was required to
settle
such a claim, it could have a material impact on our business, results of
operations, financial condition or cash flows.
The
Company is also subject to various other claims and legal actions arising
in the
ordinary course of business. The ultimate disposition of these various other
claims and legal actions is not expected to have a material effect on our
business, financial condition, results of operations or cash flows. However,
litigation is subject to inherent uncertainties.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
|
MARKET
FOR REGISTRANT’S COMMON
EQUITY, RELATED
STOCKHOLDER
MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
Our
common stock is traded on the Nasdaq Global Market under the symbol “CHRD.” The
following table shows, for the periods indicated, the high and low per share
sales prices of our common stock, as reported by the NASDAQ Global Market.
The
prices appearing in the tables below reflect over-the-counter market quotations,
which reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not necessarily represent actual transactions. The high
and
low per share prices reflects the 1 for 2.5 reverse stock split on February
20,
2007.
|
|
|
High
|
|
Low
|
|
||
|
|
Year
Ended September 30, 2007
|
|
|
|
|
|
|
|
|
First
Quarter (October 1 - December 31)
|
$
|
8.27
|
|
$
|
6.95
|
|
|
|
Second
Quarter (January 1 - March 31)
|
$
|
10.35
|
|
$
|
7.82
|
|
|
|
Third
Quarter (April 1 - June 30)
|
$
|
16.02
|
|
$
|
10.37
|
|
|
|
Fourth
Quarter (July 1 - September 30)
|
$
|
16.25
|
|
$
|
12.94
|
|
|
|
Year
Ended September 30, 2006
|
|
|
|
|
|
|
|
|
First
Quarter (October 1 - December 31)
|
$
|
7.50
|
|
$
|
6.22
|
|
|
|
Second
Quarter (January 1 - March 31)
|
$
|
8.82
|
|
$
|
6.40
|
|
|
|
Third
Quarter (April 1 - June 30)
|
$
|
9.00
|
|
$
|
7.15
|
|
|
|
Fourth
Quarter (July 1 - September 30)
|
$
|
8.00
|
|
$
|
5.72
|
|
As
of October 31, 2007, there were approximately 194 holders of record of our
common stock who together held approximately 204,362 shares of our common
stock.
The remainder of our outstanding shares is held by brokers and other
institutions on behalf of stockholders. We have never paid or declared any
cash
dividends and do not intend to pay dividends for the foreseeable future.
We
currently expect to retain working capital for use in the operation and
expansion of our business and therefore do not anticipate paying any cash
dividends.
In
response to the SEC’s adoption of Rule 10b5-1 under the Securities Exchange Act
of 1934, we approved amendments to our insider trading policy on July 20,
2001 to permit our directors, executive officers and certain key employees
to
enter into trading plans or arrangements for systematic trading in our
securities. We have been advised that certain of our directors, officers
and key
employees have entered into trading plans for selling shares in our securities.
As of September 30, 2007, the directors and executive officers who have
entered into trading plans include Derek Witte, Frank Florence, and James
D. St.
Jean. We anticipate that, as permitted by Rule 10b5-1 and our insider trading
policy, some or all of our directors, executive officers and employees may
establish trading plans at some date in the future.
Securities
Authorized for Issuance Under Equity Compensation Plans
Information
regarding our equity compensation plans, including both stockholder approved
plans and non-stockholder approved plans, will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Stockholders under
the
caption “Equity Compensation Plan Information,” and is incorporated by reference
into this report.
Recent
Sales of Unregistered Securities
None.
PERFORMANCE
MEASUREMENT COMPARISON
The
following graph shows the five-year cumulative total stockholder return of
an
investment of $100 in cash on September 30, 2002 for:
|
(i)
|
|
Our
common stock;
|
|
|
||
|
(ii)
|
|
The
Nasdaq Stock Market (U.S.) Index;
|
|
|
||
|
(iii)
|
|
The
Standard & Poor’s Application Software
Index.
|
Historic
stock price performance is not necessarily indicative of future stock price
performance. All values assume reinvestment of the full amount of all dividends,
of which there were none, and are calculated as of September 30 of each
year.
|
SELECTED
CONSOLIDATED FINANCIAL
DATA
|
We
derived the selected financial data as of September 30, 2007 and 2006 and
for
the years ended September 30, 2007, 2006, and 2005 from our audited consolidated
financial statements and notes thereto appearing in this Form 10-K. We derived
the selected financial data as of September 30, 2005 and for the nine-months
ended September 30, 2004 from our 2006 Consolidated Financial Statements
in the
2006 Annual Report on Form 10-K. The consolidated statements of operations
data
for the year ended December 31, 2003 and the consolidated balance sheets
as of
September 30, 2004 and December 31, 2003 have been restated to conform to
the
restated consolidated financial statements and are presented herein on an
unaudited basis. The following selected financial data set forth below is
not
necessarily indicative of results of future operations, and should be read
in
conjunction with Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the Consolidated Financial Statements
and related notes thereto included in Item 8 of this Annual Report on Form
10-K
to fully understand factors that may affect the comparability of the information
presented below. The financial data below reflects the 1 for 2.5 reverse
stock
split on February 20, 2007.
|
Years
Ended September 30,
|
Nine
Months Ended September 30,
|
Year
Ended December 31,
|
|||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
(unaudited)
|
|||||||||||||||||||
|
(amounts
in thousands, except per share data)
|
|||||||||||||||||||
|
Consolidated
Statements of Operations Data:
|
|
|
|
||||||||||||||||
|
Revenues
|
$
|
124,547
|
|
$
|
97,536
|
|
$
|
83,725
|
|
$
|
61,023
|
$
|
68,266
|
|
|||||
|
Net
income (loss)
|
|
6,028
|
|
(16,001
|
)
|
|
(19,865
|
)
|
(1,371
|
)
|
(17,932
|
)
|
|||||||
|
Net
income (loss) per share—basic
|
0.19
|
(0.51
|
)
|
(0.67
|
)
|
(0.05
|
)
|
(0.76
|
)
|
||||||||||
|
Net
income (loss) per share—diluted
|
$
|
0.18
|
$
|
(0.51
|
)
|
$
|
(0.67
|
)
|
$
|
(0.05
|
)
|
$
|
(0.76
|
)
|
|||||
|
Weighted
average shares used in computing net income (loss) per
share—basic
|
|
32,425
|
|
31,073
|
|
|
29,780
|
|
27,904
|
23,741
|
|
||||||||
|
Weighted
average shares used in computing net income (loss) per
share—diluted
|
33,261
|
31,073
|
|
29,780
|
27,904
|
23,741
|
|||||||||||||
|
As
of September 30,
|
As
of
December
31,
|
||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
(unaudited)
|
(unaudited)
|
||||||||||||||||||
|
(amounts
in thousands)
|
|||||||||||||||||||
|
Consolidated
Balance Sheets Data:
|
|||||||||||||||||||
|
Cash,
cash equivalents, and marketable securities
|
$
|
90,146
|
|
$
|
45,278
|
|
$
|
38,546
|
|
$
|
59,748
|
$
|
36,399
|
|
|||||
|
Working
capital
|
|
56,447
|
|
|
22,323
|
|
|
23,733
|
|
|
46,296
|
|
19,480
|
|
|||||
|
Total
assets
|
|
164,815
|
|
|
111,503
|
|
|
107,250
|
|
|
115,340
|
|
83,811
|
|
|||||
|
Current
and long term portion of capital lease obligations
|
|
—
|
|
|
95
|
|
|
309
|
|
|
508
|
|
—
|
|
|||||
|
Short-term
and long-term deferred revenue
|
|
67,982
|
|
|
29,505
|
|
|
26,197
|
|
|
20,581
|
|
18,396
|
|
|||||
|
Stockholders’
equity
|
$
|
73,361
|
|
$
|
57,225
|
|
$
|
65,157
|
|
$
|
75,912
|
$
|
48,350
|
|
|||||
No
dividends have been paid or declared since our inception. Effective January
1,
2002, the Company adopted the provisions of Statement of Financial Accounting
Standards, or SFAS, No. 142, or SFAS 142, “Goodwill and Other
Intangible Assets,” and ceased amortizing goodwill balances. Effective October
1, 2005, the Company adopted SFAS No. 123R as more fully described in Note
2 to
the Consolidated Financial Statements contained in this Annual
Report.
|
MANAGEMENT’S
DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Safe Harbor
The
following discussion and analysis contains forward-looking statements. These
statements are based on our current expectations, assumptions, estimates
and
projections about our business and our industry, and involve known and unknown
risks, uncertainties and other factors that may cause our or our industry’s
results, levels of activity, performance or achievement to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied in or contemplated by the forward-looking
statements. Words such as “believe,” “anticipate,” “expect,” “intend,” “plan,”
“will,” “may,” “should,” “estimate,” “predict,” “guidance,” “potential,”
“continue” or the negative of such terms or other similar expressions, identify
forward-looking statements. Our actual results and the timing of events may
differ significantly from those discussed in the forward-looking statements
as a
result of various factors, including but not limited to, those discussed
in
Item 1 of this Form 10-K under the caption “Risk Factors” and those
discussed elsewhere in this Annual Report and in our other filings with the
Securities and Exchange Commission. Chordiant undertakes no obligation to
update
any forward-looking statement to reflect events after the date of this
report.
Reverse
Stock Split
On
December 13, 2006, Chordiant’s Board of Directors approved a reverse two and a
half to one stock split. On February 15, 2007 at a special meeting, stockholders
approved the reverse stock split such that each outstanding two and one half
(2.5) shares of common stock were combined into and became one (1) share
of
common stock. The reverse stock split was effective February 20, 2007. All
share
and per share amounts in this form 10-K has been retroactively adjusted to
reflect the reverse stock split for all periods presented.
Executive
Overview
As
an enterprise software vendor, we generate substantially all of our revenues
from the banking, insurance, healthcare, telecommunications, and retail
industries. Our customers typically fund purchases of our software and services
out of their lines of business and information technology budgets. As a result,
our revenues are heavily influenced by our customers’ long-term business outlook
and willingness to invest in new enterprise information systems and business
applications.
In
fiscal year 2007, we recorded revenue of $124.5 million. In fiscal year 2007,
we
generated $6.0 million of net income and ended the fiscal year with over
$90.1
million in cash, cash equivalents and marketable securities as compared to
$45.3
million for the year ended September 30, 2006.
Total
revenue for the year ended September 30, 2007 increased 28% to $124.5 million
from $97.5 million of the prior year. The growth in revenue was evenly
distributed between license and service revenue, each increasing by $13.5
million. The increase in license revenue was primarily driven by an increase
in
the transaction size of license transactions in excess of $1 million as compared
to the prior year. The increase in service revenue was primarily composed
of an increase in consulting revenue of $5.2 million, an increase in
support and maintenance revenue of $8.9 million and an increase of $0.5 million
in expense reimbursement revenue offset by a decrease in training revenue
of
$1.0 million.
In
the past an increase in license revenue has resulted in a related increase
in
consulting revenue as our customers request us to assist with their
implementation efforts. The increase in support and maintenance revenue is
expected to continue if we are able to add new licenses to our existing base
of
licenses at a rate greater than customers opting not to renew their annual
support and maintenance contracts.
Software
Industry Consolidation and Possible Increased Competition
The
software industry in general is continuing to undergo a period of consolidation,
and there has been recent consolidation in sectors of the software industry
in
which we operate. Within the year Oracle announced the acquisitions of Agile
Software, an enterprise solutions software maker and Hyperion Software, a
business performance software maker. Also in 2007, IBM acquired Palisades,
a
provider of lending software to companies in the mortgage industry and SAP
has
made an offer to purchase Business Objects. In 2006, IBM acquired Webify,
a
provider of middleware to companies primarily in the insurance industry.
In
January 2006, Oracle acquired Siebel Systems, Inc., a maker of customer
relationship management software products and acquired Portal Software, a
provider of billing and revenue management solutions for the communications
and
media industry. Siebel Systems, Inc. was a competitor of ours. In September
2005, IBM had acquired DWL, a provider of middleware to companies in the
banking, insurance, retail and telecommunications industries. In 2005, Oracle
acquired I-flex Solutions, Ltd., a banking software maker headquartered in
Mumbai, India. While we do not believe that Agile Software, Hyperion Software,
Palisades, Webify, Portal Software, DWL, or I-flex Solutions have been
significant competitors of Chordiant in the past, the acquisition of these
companies by Oracle and IBM may indicate that we will face increased competition
from larger and more established entities in the future.
Financial
Trends
Backlog.
An increasingly material portion of our revenues have been derived from large
customer transactions. For some of these transactions, the associated
professional services provided to the customer can span over a period greater
than one year. If the services delivery period is over a prolonged period
of
time, it will cause the associated backlog to be recognized as revenue over
a
similar period of time. As of September 30, 2007 and 2006, we
had approximately $75.4 million and $36.0 million in backlog, respectively,
which we define as contractual commitments by our customers through purchase
orders or contracts. This increase in backlog is partially reflected in the
growth of deferred revenue recorded on our balance sheet. For the period
ended
September 30, 2006 to September 30, 2007 deferred revenue increased $38.4
million due to an increase of $20.6 million in short-term deferred revenue
and a
$17.8 million increase in long-term deferred revenue. The increase in long-term
deferred revenue was primarily driven by entering into multi-year support
and
maintenance contracts with our customers. Backlog is comprised of:
|
|
•
|
software
license orders
for which
the
delivered products
have not
been
accepted by customers or have not otherwise met all of the required
criteria for revenue recognition. This component includes billed
amounts
classified as deferred
revenue;
|
|
|
•
|
deferred
revenue from customer
support contracts;
|
|
|
•
|
consulting
service orders
representing the unbilled remaining balances of consulting contracts
not
yet completed or delivered, plus deferred consulting revenue where we
have not otherwise met
all of the required criteria for revenue
recognition.
|
Backlog
is not necessarily indicative of revenues to be recognized in a specified
future
period. There are many factors that would impact Chordiant’s conversion of
backlog as recognizable revenue, such as Chordiant’s progress in completing
projects for its customers, Chordiant’s customers’ meeting anticipated schedules
for customer-dependent deliverables and customers increasing the scope or
duration of a contract causing license revenue to be deferred for a longer
period of time.
Chordiant
provides no assurances that any portion of its backlog will be recognized
as
revenue during any fiscal year or at all, or that its backlog will be recognized
as revenues in any given period. In addition, it is possible that customers
from
whom we expect to derive revenue from backlog will default, and as a result,
we
may not be able to recognize expected revenue from backlog.
For
the year ended September 30, 2007, we entered into several large customer
orders
resulting in a significant portion of our near term license revenues being
recognized under the percentage-of-completion method of accounting such that
our
deferred revenue balance increased. These orders will require consulting
services that are essential to the functionality of the respective
licenses.
Implementation
by Third Parties. Over time, as our products mature and system integrators
become more familiar with our products, our involvement with implementations
has
diminished on some projects. If this trend continues to evolve, certain
agreements with customers may transition from a contract accounting model
(SOP 81-1) to a more traditional revenue model whereby revenues are
recorded upon delivery.
Service
Revenues. Service revenues as a percentage of total revenues were
57%, 58%, and 62% for the years ended September 30, 2007, 2006, and 2005,
respectively. We expect that service revenues will represent between 50%
and 60%
of our total revenues in the foreseeable future.
Revenues
from International Customers versus
North America. For all
periods presented, revenues were
principally derived from customer accounts in North America and Europe. For
the
years ended September 30, 2007, 2006, and 2005, international revenues were
$58.8 million, $37.5 million, and $42.0 million or approximately 47%, 38%,
and 50% of our total revenues, respectively. We believe international
revenues will continue to represent a significant portion of our total revenues
in future periods. The significant increase in international revenue for
year
ended September 30, 2007, as compared to the prior fiscal year was due to
an
improved economy for the region as well as an improved sales production for
the
region resulting from the new management team that was put in place over
the
past several quarters. International revenues were favorably impacted for
the
year ended September 30, 2007, as compared to the year ended September 30,
2006,
as both the British Pound and the Euro increased in average value by
approximately 9% and 8%, respectively, as compared to the U.S.
Dollar. International revenues were negatively impacted for the year ended
September 30, 2006, as compared to the year ended September 30, 2005, as
both
the British Pound and the Euro decreased in average value by less than 1%
and
approximately 3%, respectively, as compared to the U.S. Dollar.
For
the years ended September 30, 2007, 2006, and 2005, North America revenues
were
$65.7 million, $60.0 million, and $41.7 million or approximately 53%, 62%,
and
50% of our total revenues, respectively. As the U.S. economy has
remained
strong,
we have seen an increase in North America revenues. Large customers have
become
more willing to invest in new enterprise infrastructure projects. We believe
North America revenues will continue to represent 50% to 60% of our total
revenues in the future.
Gross
margins. Management focuses on license and service gross margin in
evaluating our financial condition and operating performance. Gross margins
on
license revenues were 97%, 96%, and 97% for the years ended September 30,
2007,
2006, and 2005, respectively. The changes in gross margins are primarily
related
to the amortization expense associated with capitalized software development
costs pertaining to a banking product. We expect license gross margin on
current
products to range from 95% to 97% in the foreseeable future. The margin will
fluctuate with the mix of products sold. Historically, the enterprise solution
products have higher associated third party royalty expense than the marketing
solution products and decision management products.
Gross
margins on service revenues were 57%, 46%, and 42% for the years ended September
30, 2007, 2006, and 2005, respectively. The increase in gross margins for
the
year ended September 30, 2007 is primarily due to improved consulting services
utilization rates and increased support and maintenance revenue. We expect
that
gross margins on service revenue to range between 55% and 60% in the foreseeable
future. Margins can be negatively impacted during, and immediately following,
periods in which professional service department headcounts increase, as
resources are not immediately billable.
Acquisition
of KiQ Limited. On December 21, 2004, we acquired KiQ Limited, a
privately-held United Kingdom software company with branch offices in the
Netherlands, or KiQ, specializing in the development and sales of decision
management systems. The year ended September 30, 2005 includes the revenue
and expense of KiQ from the acquisition date, December 21, 2004, through
the end
of the fiscal year, September 30, 2005. The years ended September 30, 2007
and
2006 include the revenues and expenses of KiQ for the entire fiscal
year.
Costs
Related to Compliance with the Sarbanes-Oxley Act of
2002. Significant professional service expenses are included in general and
administrative costs relating to efforts to comply with the Sarbanes-Oxley
Act
of 2002. For the years ended September 30, 2007, 2006, and 2005, these costs
were $1.0 million, $1.8 million, and $4.5 million, respectively. While these
costs are expected to continue into the next fiscal year, the decline in
amount
and timing of the costs through fiscal year 2008 is uncertain as compared
to the
costs incurred for the year ended September 30, 2007.
Costs
Related to Stock Option
Investigation.
Significant
outside professional services
are included in general and administrative costs associated with the Company’s
stock option investigation which began in July 2006 and was completed during
the
quarter ended March 31, 2007. This issue is more fully described in the in
Note
3, “Restatement of Previously Issued Consolidated Financial Statements” in Notes
to Consolidated Financial Statements of the Annual Report on Form 10-K for
the
fiscal year ended September 30, 2006. For the year ended September 30, 2007
and
2006, these costs were $1.8 and $1.2 million, respectively. We have not incurred
any additional costs since the quarter ended March 31, 2007 and do not expect
to
incur such costs in future periods.
Cost
to Amend Eligible Options. In July 2006, our Board of Directors (the
“Board”) initiated a review of our historical stock option grant practices
and
appointed the Audit Committee to oversee the investigation. The Audit Committee
determined that the correct measurement dates for a number of stock option
grants made by us during the period 2000 to 2006, or Review Period, differ
from
the measurement dates previously used to account for such option grants.
The
Audit Committee identified errors related to the determination of the
measurement dates for grants of options where the price of our common stock
on
the selected grant date was lower than the price on the actual grant date
which
would permit recipients to exercise these options at a lower exercise price.
As
such, these affected stock options are deemed, for accounting purposes, to
have
been granted at a discount. Based on the determination made for accounting
purposes, the discounted options (for accounting purposes) may now be deemed
to
have been granted at a discount for tax purposes, which may expose the holders
of these impacted stock option grants to potentially adverse tax treatment
under
Section 409A of the Internal Revenue Code and state law equivalents. As more
fully described on Form SC TO-I filed with the SEC on March 29, 2007,
Chordiant offered certain optionees the opportunity to increase the
exercise price of the discounted options to limit the potential adverse personal
tax consequences that may apply to those stock options under Section 409A
of the
Internal Revenue Code and state law equivalents. On April 26, 2007, eligible
optionees finalized their elections under the offer and were awarded a future
cash payment equal to the price differential of the Amended Options. These
payments will be treated as bonus payments. These cash payments will be
approximately $0.3 million and will be paid out in January 2008. The cost
of
these bonus payments were fully accrued as of September 30, 2007.
Reduction
in Workforce. In October 2006, the Company initiated a
restructuring plan intended to align its resources and cost structure with
expected future revenues. The restructuring plan included a balancing of
services resources worldwide, an elimination of duplicative functions
internationally, and a shift in the U.S. field organization toward a focus
on
domain-based sales and pre-sales teams.
The
restructuring plan included an immediate reduction in positions of slightly
more
than ten percent of the Company's workforce, consolidation of our European
facilities, and the closure of our France office. A majority of the positions
eliminated were in Europe. The plan was committed to on October 24, 2006,
and we
began notifying employees on October 25, 2006.
We
recorded a pre-tax cash restructuring expense of $6.1 million as calculated
using the net present value of the related costs as required by SFAS 146.
The
expense was composed of $1.8 million for severance costs and $4.4 million
for
exiting excess facilities of which $1.0 million of the excess facility expense
is associated with non-cash expenses for the write-off of leasehold improvements
and the reversal of a favorable purchase price adjustment related to the
France
office lease. We anticipated that $5.1 million of the expense would result
in
cash expenditures. As of September 30, 2007, we have paid $2.7 million in
cash
payments and expect to pay the remaining $2.5 million during the first six
months of fiscal year 2008. In November 2007, we expect to negotiate a break
clause in the lease allowing for an early termination of the United Kingdom
facility which will release us of any future rent liabilities subsequent
to
January 2008. As of September 30, 2007, we expect the current accrued
restructuring balance to be sufficient in amount to cover all future rental
and
lease termination payments; therefore, we do not anticipate any incremental
restructuring expenses to terminate this lease early. All obligations related
to
severance and benefits have been paid as of September 30, 2007.
In
July 2005, we undertook an approximate 10% reduction in our workforce. In
connection with this action, we incurred a one-time cash expense of
approximately $1.0 million in the fourth quarter ended September 30, 2005
for severance benefits. As of September 30, 2007, $0.1 million of the cash
charges remains outstanding.
During
fiscal year 2002, we restructured several areas of the Company to reduce
expenses and improve revenues. As part of this restructuring, we closed an
office facility in Boston, Massachusetts and recorded an expense associated
with
the long-term lease which expires in January 2011. During the three months
ended
March 31, 2007, we completed a new sublease with a sub-lessee for the remaining
term of our lease at a rate lower than that which was forecasted when the
original restructuring expense was recorded in 2002. This change in estimate
resulted in a $0.4 million restructuring expense for the year ended September
30, 2007.
Past
Results may not be
Indicative of
Future
Performance. We believe that period-to-period comparisons of our
operating results should not be relied upon as indicative of future performance.
Our prospects must be considered given the risks, expenses and difficulties
frequently encountered by companies in new and rapidly evolving businesses.
There can be no assurance we will be successful in addressing these risks
and
difficulties. Moreover, we may not achieve or maintain profitability in the
future.
Critical
Accounting Estimates
Our
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates
and
judgments that affect the reported amounts of assets, liabilities, revenues
and
expenses, and related disclosure of contingent assets and
liabilities.
On
an on-going basis, we evaluate the estimates, including those related to
our
allowance for doubtful accounts, valuation of stock-based compensation,
valuation of goodwill and intangible assets, valuation of deferred tax assets,
restructuring expenses, contingencies, vendor specific objective evidence,
or
VSOE, of fair value in multiple element arrangements and the estimates
associated with the percentage-of-completion method of accounting for certain
of
our revenue contracts. We base our estimates on historical experience and
on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We
believe the following critical accounting judgments and estimates are used
in
the preparation of our consolidated financial statements:
|
|
•
|
Revenue
recognition, including
estimating the total estimated time required to complete sales
arrangements involving significant implementation or customization
essential to the functionality of our
products;
|
|
|
•
|
Estimating
valuation allowances and accrued liabilities, specifically the
allowance
for doubtful accounts, and assessment of the probability of the
outcome of
our current litigation;
|
|
|
•
|
Stock-based
compensation expense;
|
|
|
•
|
Accounting
for income taxes;
|
|
|
•
|
Valuation
of long-lived and
intangible assets and
goodwill;
|
|
|
•
|
Restructuring
expenses;
and
|
|
|
•
|
Determining
functional currencies
for the purposes of consolidating our international
operations.
|
Revenue
Recognition. We derive revenues from licenses of our
software and related services, which include assistance in implementation,
customization and integration, post-contract customer support, training and
consulting. The amount and timing of our revenue is difficult to predict
and any
shortfall in revenue or delay in recognizing revenue could cause our operating
results to vary significantly from quarter to quarter and could result in
operating losses. The accounting rules related to revenue recognition are
complex and are affected by interpretation of the rules and an understanding
of
industry practices, both of which are subject to change. Consequently, the
revenue recognition accounting rules require management to make significant
estimates based on judgment.
Software
license revenue is recognized in accordance with Statement of Position No.
97-2
“Software Revenue Recognition,” as amended by Statement of Position No. 98-9
“Software Revenue Recognition with Respect to Certain Arrangements”, or
collectively SOP 97-2.
For
arrangements with multiple elements, we recognize revenue for services and
post-contract customer support based upon the fair value VSOE of the respective
elements. The fair value VSOE of the services element is based upon
the standard hourly rates we charge for the services when such services are
sold
separately. The fair value VSOE for annual post-contract customer support
is
generally established with the contractual future renewal rates included
in the
contracts, when the renewal rate is substantive and consistent with the fees
when support services are sold separately. When contracts contain multiple
elements and fair value VSOE exists for all undelivered elements, we account
for
the delivered elements, principally the license portion, based upon the
“residual method” as prescribed by SOP 97-2. In multiple element transactions
where VSOE is not established for an undelivered element, we recognize revenue
upon the establishment of VSOE for that element or when the element is
delivered.
At
the time we enter into a transaction, we assess whether any services included
within the arrangement related to significant implementation or customization
essential to the functionality of our products. For contracts for products
that
do not involve significant implementation or customization essential to the
product functionality, we recognize license revenues when there is persuasive
evidence of an arrangement, the fee is fixed or determinable, collection
of the
fee is probable and delivery has occurred as prescribed by SOP 97-2. For
contracts that involve significant implementation or customization essential
to
the functionality of our products, we recognize the license and professional
consulting services revenue using either the percentage-of-completion method
or
the completed contract method as prescribed by Statement of Position No.
81-1,
“Accounting for Performance of Construction-Type and Certain Product-Type
Contracts”, or SOP 81-1.
The
percentage-of-completion method is applied when we have the ability to make
reasonably dependable estimates of the total effort required for completion
using labor hours incurred as the measure of progress towards completion.
The
progress toward completion is measured based on the “go-live” date. We define
the “go-live” date as the date the essential product functionality has been
delivered or the application enters into a production environment or the
point
at which no significant additional Chordiant supplied professional service
resources are required. Estimates are subject to revisions as the contract
progresses to completion. We account for the changes as changes in accounting
estimates when the information becomes known. Information impacting estimates
obtained after the balance sheet date but before the issuance of the financial
statements is used to update the estimates. Provisions for estimated contract
losses, if any, are recognized in the period in which the loss becomes probable
and can be reasonably estimated. When we sell additional licenses related
to the
original licensing agreement, revenue is recognized upon delivery if the
project
has reached the go-live date, or if the project has not reached the go-live
date, revenue is recognized under the percentage-of-completion method. We
classify revenues from these arrangements as license and service revenue
based
upon the estimated fair value of each element using the residual
method.
The
completed contract method is applied when we are unable to obtain reasonably
dependable estimates of the total effort required for completion. Under the
completed contract method, all revenue and related costs of revenue are deferred
and recognized upon completion.
For
product co-development arrangements relating to software products in development
prior to the consummation of the individual arrangements where we retain
the
intellectual property being developed and intend to sell the resulting products
to other customers, license revenue is deferred until the delivery of the
final
product, provided all other requirements of SOP 97-2 are met. Expenses
associated with these co-development arrangements are accounted for under
SFAS
86 and are normally expensed as incurred as they are considered to be research
and development costs that do not qualify for capitalization or
deferral.
Revenue
from subscription or term license agreements, which include software and
rights
to unspecified future products or maintenance, is recognized ratably over
the
term of the subscription period. Revenue from subscription or term license
agreements, which include software, but exclude rights to unspecified future
products and maintenance, is recognized upon delivery of the software if
all
conditions of recognizing revenue have been met including that the related
agreement is non-cancelable, non-refundable and provided on an unsupported
basis.
We
recognize revenue for post-contract customer support ratably over the support
period which ranges from one to five years.
Our
training and consulting services revenues are recognized as such services
are
performed on an hourly or daily basis for time and material contracts. For
consulting services arrangements with a fixed fee, we recognize revenue on
a
percentage-of-completion method.
For
all sales we use either a signed license agreement or a binding purchase
order
where we have a master license agreement as evidence of an arrangement. Sales
through our third party systems integrators are evidenced by a master agreement
governing the relationship together with binding purchase orders or order
forms
on a transaction-by-transaction basis. Revenues from reseller arrangements
are
recognized on the “sell-through” method, when the reseller reports to us the
sale of our software products to end-users. Our agreements with customers
and
resellers do not contain product return rights.
We
assess collectibility based on a number of factors, including past transaction
history with the customer and the credit-worthiness of the customer. We
generally do not request collateral from our customers. If we determine that
the
collection of a fee is not probable, we recognize revenue at the time collection
becomes probable, which is generally upon the receipt of cash. If a transaction
includes extended payment terms, we recognized revenue as the payments become
due and payable.
Allowance
for Doubtful Accounts. We must make
estimates of the uncollectability of our accounts receivables. We specifically
analyze accounts receivable and analyze historical bad debts, customer
concentrations, customer credit-worthiness and current economic trends when
evaluating the adequacy of the allowance for doubtful accounts. Generally,
we
require no collateral from our customers. Our gross accounts receivable balance
was $28.5 million (including long-term accounts receivable of $0.9 million)
with
an allowance for doubtful accounts of $0.2 million as of September 30, 2007.
Our
gross accounts receivable balance was $19.1 million with an allowance for
doubtful accounts of $0.1 million as of September 30, 2006. If the financial
condition of our customers were to deteriorate, resulting in an impairment
of
their ability to make payments, additional allowances would be required.
To
date, bad debts have not been material and have been within management’s
expectations.
Stock-based
Compensation Expense. Upon adoption of SFAS 123(R) on October 1, 2005,
we began estimating the value of employee stock options on the date of grant
using the Black-Scholes model. Prior to the adoption of SFAS 123(R), the
value
of each employee stock option was estimated on the date of grant using the
Black-Scholes model for the purpose of the pro forma financial disclosure
in
accordance with SFAS 123. The determination of fair value of share-based
payment awards on the date of grant using an option-pricing model is affected
by
our stock price as well as assumptions regarding a number of highly
complex and subjective variables. These variables include, but are not
limited to the expected stock price volatility over the term of the awards,
and
actual and projected employee stock option exercise behaviors.
With
the adoption of SFAS 123(R) on October 1, 2005, we used the trinomial
lattice valuation technique to determine the assumptions used in the
Black-Scholes model. The trinomial lattice valuation technique was used to
provide better estimates of fair values and meet the fair value objectives
of
SFAS 123(R). The expected term of options granted is derived from
historical data on employee exercises and post-vesting employment termination
behavior. The expected volatility is based on the historical volatility of
our
stock.
As
stock-based compensation expense recognized in the Consolidated Statement
of
Operations for fiscal year 2007 is based on awards ultimately expected to
vest,
it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Forfeitures were
estimated based on historical experience.
If
factors change and we employ different assumptions in the application of
SFAS
123(R) in future periods, the compensation expense that we record under SFAS
123(R) may differ significantly from what we have recorded in the current
period. The estimated value of a stock option is most sensitive to the
volatility assumption. Based on the September 30, 2007 variables, it is
estimated that a change of 10% in either the volatility, expected life or
interest rate assumption would result in a corresponding 7%, 5% or 1% change
in
the estimated value of the option being valued using the Black-Scholes
model.
Accounting
for Income Taxes. As part of the
process of preparing our consolidated financial statements we are required
to
estimate our income taxes in each of the jurisdictions in which we operate.
This
process involves estimating our actual current tax
exposure
together with assessing temporary differences resulting from differing treatment
of items, such as deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheet. We must then assess the likelihood
that
our deferred tax assets will be recovered from future taxable income and
to the
extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision
in
the Consolidated Statement of Operations.
We
have recorded a valuation allowance equal to 100% of the deferred tax assets
as
of September 30, 2007, due to uncertainties related to our ability to utilize
our net deferred tax assets, primarily consisting of certain net operating
losses carried forward and research and development tax credits. Deferred
tax
assets have been fully reserved for in all periods presented. We were profitable
for the quarters ended March 31, 2007, June 30, 2007, and September 30, 2007
and
if we continue to be profitable in the near term, we will need to re-evaluate
the 100% valuation allowance.
Valuation
of Long-lived and Intangible
Assets and Goodwill.
We assess the
impairment of identifiable intangibles and long-lived assets whenever events
or
changes in circumstances indicate that the carrying value may not be
recoverable. Furthermore, we assess the impairment of goodwill annually.
Factors
we consider important which could trigger an impairment review include the
following:
|
|
•
|
Significant
underperformance
relative to expected historical or projected future operating
results;
|
|
|
•
|
Significant
changes in the manner of our use of the acquired assets or the
strategy
for our overall business;
|
|
|
•
|
Significant
negative industry or economic
trends;
|
|
|
•
|
Significant
decline in our stock
price for a sustained
period;
|
|
|
•
|
Market
capitalization declines
relative to net book value;
and
|
|
|
•
|
A
current expectation that, more
likely than not, a long-lived asset will be sold or otherwise disposed
of
significantly before the end of its previously estimated useful
life.
|
When
one or more of the above indicators of impairment occurs we estimate the
value
of long-lived assets and intangible assets to determine whether there is
impairment. We measure any impairment based on the projected discounted cash
flow method, which requires us to make several estimates including the estimated
cash flows associated with the asset, the period over which these cash flows
will be generated and a discount rate commensurate with the risk inherent
in our
current business model. These estimates are subjective and if we made different
estimates, it could materially impact the estimated fair value of these assets
and the conclusions we reached regarding impairment. To date, we have not
identified any triggering events noted above.
We
are required to perform an impairment review of our goodwill balance on at
least
an annual basis. This impairment review involves a two-step process as
follows:
Step
1—We compare the fair value of our reporting units to the carrying value,
including goodwill, of each of those units. For each reporting unit where
the
carrying value, including goodwill, exceeds the unit’s fair value, we proceed on
to Step 2. If a unit’s fair value exceeds the carrying value, no further work is
performed and no impairment charge is necessary.
Step
2—We perform an allocation of the fair value of the reporting unit to our
identifiable tangible and non-goodwill intangible assets and liabilities.
This
derives an implied fair value for the reporting unit’s goodwill. We then compare
the implied fair value of the reporting unit’s goodwill with the carrying amount
of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s
goodwill is greater than the implied fair value of its goodwill, an impairment
charge would be recognized for the excess.
We
determined that we have one reporting unit. We completed a goodwill impairment
review for the period including September 30, 2007 and 2006 and performed
Step 1 of the goodwill impairment analysis required by SFAS No. 142,
“Goodwill and Other Intangible Assets,” and concluded that goodwill was not
impaired as of September 30, 2007 and 2006 using the methodology described
above. Accordingly, Step 2 was not performed. We will continue to test for
impairment on an annual basis and on an interim basis if an event occurs
or
circumstances change that would more likely than not reduce the fair value
of
our reporting units below their carrying amount.
Restructuring
Expenses. In the past five years, we have
implemented cost-reduction plans as part of our continued effort to streamline
our operations to reduce ongoing operating expenses. These plans resulted
in
restructuring expenses related to, among others, the consolidation of excess
facilities. These charges relate to facilities and portions of facilities
we no
longer utilize and either seek to terminate early or sublease. Lease termination
costs and brokerage fees for the abandoned facilities were estimated for
the
remaining lease obligations and were offset by estimated sublease income.
Estimates related to sublease costs and income are based on assumptions
regarding the period required to locate and contract with suitable sub-lessees
and sublease rates which can be achieved using market trend information analyses
provided by a commercial real estate brokerage retained by us. Each reporting
period we review these estimates and to the extent that these assumptions
change
due to new agreements with landlords, new subleases with tenants, or changes
in
the market, the ultimate restructuring expenses for these abandoned facilities
could vary by material amounts.
Determining
Functional Currencies for the
Purpose of
Consolidation. We
have several foreign
subsidiaries that together account for a significant portion of our revenues,
expenses, assets and liabilities.
In
preparing our consolidated financial statements, we are required to translate
the financial statements of the foreign subsidiaries from the currency in
which
they keep their accounting records, generally the local currency, into United
States Dollars. This process results in exchange gains and losses which,
under the relevant accounting guidance are either included within the
Consolidated Statement of Operations or as a separate part of the Consolidated
Statements of Stockholders Equity and Comprehensive Income (Loss) under the
caption “accumulated other comprehensive income (loss).” Under the relevant
accounting guidance, the treatment of these translation gains or losses is
dependent upon management’s determination of the functional currency of each
subsidiary. The functional currency is determined based on management’s judgment
and involves consideration of all relevant economic facts and circumstances
affecting the subsidiary. Generally, the currency in which the subsidiary
conducts a majority of its transactions, including billings, financing, payroll
and other expenditures would be considered the functional currency but any
dependency upon the parent and the nature of the subsidiary’s operations must
also be considered.
If
any subsidiary’s functional currency were deemed to be the local currency, then
any gain or loss associated with the translation of that subsidiary’s financial
statements would be included in cumulative translation adjustments. However,
if
the functional currency were deemed to be the United States Dollar then any
gain
or loss associated with the translation of these financial statements would
be
included within our Consolidated Statement of Operations. If we dispose of
any
of our subsidiaries, any cumulative translation gains or losses would be
recognized in our Consolidated Statement of Operations. If we determine that
there has been a change in the functional currency of a subsidiary to the
United
States Dollar, any translation gains or losses arising after the date of
change
would be included within our Consolidated Statement of Operations.
Based
on our assessment of the factors discussed above, we consider the relevant
subsidiary’s local currency to be the functional currency for each of our
international subsidiaries. Accordingly, foreign currency translation gains
and
loses are included as part of accumulated other comprehensive income within
our
balance sheet for all periods presented.
The
foreign currency gains or losses are dependent upon movements in the exchange
rates of the foreign currencies in which we transact business against the
United
States Dollar. These currencies include the United Kingdom Pound Sterling,
the Euro and the Canadian Dollar. Any future translation gains or losses
could
be significantly different than those reported in previous periods. At September
30, 2007, approximately $48.4 million of our cash and cash equivalents were
held
by our subsidiaries outside of the United States.
Recent
Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board, or FASB, issued
SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”,
or SFAS 159. SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. SFAS 159 is effective
for
fiscal years beginning after November 15, 2007. The Company has evaluated the
new pronouncement and has determined that it will not have a significant
impact
on the determination or reporting of our financial results.
In
December 2006, the FASB issued Staff Position, or FSP, EITF 00-19-2, “Accounting
for Registration Payment Arrangements.” This FSP specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as
a
separate agreement or included as a provision of a financial instrument or
other
agreement, should be separately recognized and measured in accordance with
FASB
Statement No. 5, “Accounting for Contingencies.” The guidance is effective for
fiscal years beginning after December 15, 2006. The Company has evaluated
the
new pronouncement and has determined that it will not have a significant
impact
on the determination or reporting of our financial results.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements”, or SAB 108. SAB 108 provides
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year
misstatement. The guidance is applicable for fiscal years ending
after November 15, 2006. The Company has evaluated the new statement and
has
determined that it will not have a significant impact on the determination
or
reporting of our financial results.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement”, or SFAS
157. SFAS 157 defines fair value, establishes a framework for measuring fair
value, and also expands disclosures about fair value
measurements. The SFAS 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
Company has evaluated the new pronouncement and has determined that it will
not
have a significant impact on the determination or reporting of our financial
results.
In
July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes”, an interpretation of SFAS No. 109,
“Accounting for Income Taxes” or FIN 48. FIN 48 requires that a position
taken or expected to be taken in a tax return be recognized in the financial
statements when it is more likely than not (i.e. a likelihood of more than
fifty
percent) that the position would be sustained upon examination by tax
authorities. A recognized tax position is then measured at the largest
amount of
benefit that is greater than fifty percent likely of being realized upon
ultimate settlement. Upon adoption, the cumulative effect of applying the
recognition and measurement provisions of FIN 48, if any, shall be
reflected as an adjustment to the opening balance of retained
earnings.
FIN 48
also requires expanded disclosures including identification of tax positions
for
which it is reasonably possible that the total amount of unrecognized tax
benefits will significantly change in the next twelve months, a description
of
tax years that remain subject to examination by major tax jurisdictions,
a
tabular reconciliation of the total amount of unrecognized tax benefits
at the
beginning and end of each annual reporting period, the total amount of
unrecognized tax benefits that, if recognized, would affect the effective
tax
rate and the total amounts of interest and penalties recognized in the
statements of operations and financial position. FIN 48 is effective for
fiscal years beginning after December 15, 2006, and the Company expects to
adopt this standard in the fiscal year commencing on October 1, 2007. The
Company has not yet determined the impact of the recognition and measurement
requirements of FIN 48 on our existing tax positions.
In
May 2007, the FASB issued FSP FIN 48-1, “Definition of Settlement in FASB
Interpretation No. 48”, which provides guidance on how a company should
determine whether a tax position is effectively settled for the purpose
of
recognizing previously unrecognized tax benefits.
Results
of Operations
The
following table sets forth, in dollars (in thousands) and as a percentage
of
total revenues, consolidated statements of operations data for the periods
indicated. This information has been derived from the consolidated financial
statements included elsewhere in this Annual Report.
|
Years
Ended September 30,
|
||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||
|
Statements
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
License
|
|
$
|
54,052
|
|
43
|
%
|
$
|
40,514
|
|
42
|
%
|
$
|
31,678
|
|
38
|
%
|
||||||
|
Service
|
|
|
70,495
|
|
57
|
|
|
57,022
|
|
58
|
|
|
52,047
|
|
62
|
|
||||||
|
Total
revenues
|
|
|
124,547
|
|
100
|
|
|
97,536
|
|
100
|
|
|
83,725
|
|
100
|
|
||||||
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
License
|
|
|
1,813
|
|
2
|
|
|
1,690
|
|
2
|
|
|
1,079
|
|
1
|
|
||||||
|
Service
|
|
|
30,329
|
|
24
|
|
|
30,566
|
|
31
|
|
|
30,155
|
|
36
|
|
||||||
|
Amortization
of intangible assets
|
|
|
1,211
|
|
1
|
|
|
1,211
|
|
1
|
|
|
1,068
|
|
2
|
|
||||||
|
Total
cost of revenues
|
|
|
33,353
|
|
27
|
|
|
33,467
|
|
34
|
|
|
32,302
|
|
39
|
|
||||||
|
Gross
profit
|
|
|
91,194
|
|
73
|
|
|
64,069
|
|
66
|
|
|
51,423
|
|
61
|
|
||||||
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Sales
and marketing
|
|
|
32,597
|
|
26
|
|
|
33,616
|
|
34
|
|
|
29,561
|
|
36
|
|
||||||
|
Research
and development
|
|
|
27,546
|
|
22
|
|
|
25,858
|
|
27
|
|
|
20,272
|
|
24
|
|
||||||
|
General
and administrative
|
|
|
19,898
|
|
16
|
|
|
20,445
|
|
21
|
|
|
18,549
|
|
22
|
|
||||||
|
Amortization
of intangible assets
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
117
|
|
—
|
|
||||||
|
Restructuring
expense
|
|
|
6,543
|
|
6
|
|
|
—
|
|
—
|
|
|
1,052
|
|
1
|
|
||||||
|
Purchased
in-process research and development
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
1,940
|
|
2
|
|
||||||
|
Total
operating expenses
|
|
|
86,584
|
|
70
|
|
|
79,919
|
|
82
|
|
|
71,491
|
|
85
|
|
||||||
|
Income
(loss) from operations
|
|
|
4,610
|
3
|
|
(15,850
|
)
|
(16
|
)
|
|
(20,068
|
)
|
(24
|
)
|
||||||||
|
Interest
income, net
|
|
|
2,198
|
|
2
|
|
|
1,120
|
|
1
|
|
|
755
|
|
1
|
|
||||||
|
Other
income (expense), net
|
|
|
822
|
1
|
|
|
(627
|
)
|
—
|
|
(103
|
)
|
—
|
|
||||||||
|
Income
(loss) before income taxes
|
|
|
7,630
|
6
|
|
(15,357
|
)
|
(15
|
)
|
|
(19,416
|
)
|
(23
|
)
|
||||||||
|
Provision
for income taxes
|
|
|
1,602
|
|
1
|
|
|
644
|
|
1
|
|
|
449
|
|
1
|
|
||||||
|
Net
income (loss)
|
|
$
|
6,028
|
5
|
%
|
$
|
(16,001
|
)
|
(16
|
)%
|
$
|
(19,865
|
)
|
(24
|
)%
|
|||||||
Comparison
of the Year Ended September 30, 2007 to the Year Ended September 30,
2006
Revenues
License
Revenue. The increase or decrease of
license revenue occurring within the three different product groups is dependent
on the timing of when a sales transaction is completed and whether a license
transaction was sold with essential consulting services. Products licensed
with
essential consulting services are generally recognized as revenue under the
percentage-of-completion method of accounting. The timing and amount of revenue
for those transactions being recognized under the percentage-of-completion
is
influenced by the progress of work performed relative to the project length
of
customer contracts and the dollar value of such contracts. The following
table sets forth our license revenue by product emphasis for the years ended
September 30, 2007 and 2006 (in thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2007
|
2006
|
Change
|
%
|
||||||||||||||
|
License
Revenue:
|
|||||||||||||||||
|
Enterprise
solutions
|
$
|
37,648
|
$
|
30,351
|
$
|
7,297
|
24
|
%
|
|||||||||
|
Marketing
solutions
|
|
6,013
|
|
6,396
|
|
(383
|
)
|
(6
|
)
|
||||||||
|
Decision
management solutions
|
10,391
|
3,767
|
6,624
|
176
|
|||||||||||||
|
Total
license revenue
|
$
|
54,052
|
$
|
40,514
|
$
|
13,538
|
33
|
%
|
|||||||||
Total
license revenue increased $13.5 million, or 33%, for the year ended September
30, 2007 compared to the same period of the prior year. A significant portion
of
this increase is attributable to a single customer that purchased a perpetual
product license as part of a $20.0 million agreement. The value of this
agreement has been allocated as follows: $12.2 million to license fees, $7.1
million to support and maintenance fees expected to be recognized over the
next
five year period, and $0.7 million to consulting fees. The license amount
was
recorded as deferred license revenue at the inception of the agreement and
is
being recognized on a percentage-of-completion basis due to the essential
services required for the functionality of the software. For the year ended
September 30, 2007, $11.3 million of license revenue has been recognized
in
connection with this agreement.
In
addition to the revenue contribution from the aforementioned customer, the
increase in license revenue for the year ended September 30, 2007 was primarily
due to the growth in the absolute dollar size of transactions in excess of
$1
million as compared to the same period of the prior year.
Service
Revenue. Service revenue is primarily composed of
consulting implementation and integration, consulting customization, training,
post-contract customer support services, or PCS, and certain reimbursable
out-of-pocket expenses. The increase or decrease of service revenue within
the
three different product emphases is primarily due to the timing of when license
transactions are completed, whether or not the license was sold with essential
consulting services, the sophistication of the customer’s application, and the
expertise of the customer’s internal development team. For other service
transactions, service revenue will lag in timing compared to the period of
when
the license revenue is recognized. The following table sets forth our service
revenue by product emphasis for the years ended September 30, 2007 and 2006
(in
thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2007
|
2006
|
Change
|
%
|
||||||||||||||
|
Service
Revenue:
|
|||||||||||||||||
|
Enterprise
solutions
|
$
|
51,584
|
$
|
39,911
|
$
|
11,673
|
29
|
%
|
|||||||||
|
Marketing
solutions
|
|
12,369
|
|
12,996
|
|
(627
|
)
|
(5
|
)
|
||||||||
|
Decision
management solutions
|
6,542
|
4,115
|
2,427
|
59
|
|||||||||||||
|
Total
license revenue
|
$
|
70,495
|
$
|
57,022
|
$
|
13,473
|
24
|
%
|
|||||||||
Total
service revenue increased $13.5 million or 24% for the year ended September
30, 2007 compared to the same period of the prior year. The $13.5 million
increase is primarily related to increases of $8.9 million in PCS revenue,
$5.2
million in consulting revenue, $0.5 million in reimbursement of
out-of-pocket expense revenue offset by a decrease of $1.0 million in training
revenue. The increase in PCS revenue is a function of the growth in new license
bookings sold with PCS agreements combined with the renewal of existing PCS
customers at a rate in excess of existing customers, declining the service
in
the year of renewal. The increase in consulting revenue is a direct result
of
the growth in license revenue as the majority of our customers will use some
form of our consulting services in connection with their project.
Cost
of Revenues
License.
Cost of license revenues includes third party software royalties and
amortization of capitalized software development costs. Royalty expenses
can
vary depending upon the mix of products sold within the period. The capitalized
software development costs pertain to a banking product that was completed
and
available for general release in August 2005 and the third party costs
associated with the porting of a product to a new platform. The porting project
was completed in August 2007 and the aggregate costs capitalized were $0.5
million. Amortization expense for the banking product and porting project
for
the year ended September 30, 2007 were $0.9 million and less than $0.1 million,
respectively. Amortization costs for the banking product are expected
through 2008 and amortization costs of the porting project are expected through
2010. The following table sets forth our cost of license revenues for the
years ended September 30, 2007 and 2006 (in thousands, except
percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2007
|
2006
|
Change
|
%
|
||||||||||||||
|
Cost
of license revenue
|
$
|
1,813
|
$
|
1,690
|
$
|
123
|
7
|
%
|
|||||||||
|
Percentage
of total revenue
|
2
|
%
|
2
|
%
|
|||||||||||||
Cost
of license revenues increased $0.1 million or 7% for the year ended September
30, 2007 as compared to the same period of the prior year. The primary reason
for the increase was due to the growth of license revenue year-over-year
leading
to an increase in third party royalty costs.
Service.
Cost of service revenues consists primarily of personnel, third party
consulting, facility and travel costs incurred to provide consulting
implementation and integration, consulting customization, training, PCS support
services. The following table sets forth our cost of service revenues for
the years ended September 30, 2007 and 2006 (in thousands, except
percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2007
|
2006
|
Change
|
%
|
||||||||||||||
|
Cost
of service revenue
|
$
|
30,329
|
$
|
30,566
|
$
|
(237
|
)
|
(1
|
)%
|
||||||||
|
Percentage
of total revenue
|
24
|
%
|
31
|
%
|
|||||||||||||
Cost
of service revenue decreased by $0.2 million or 1% for the year ended September
30, 2007 as compared to the same period of the prior year. This change is
primarily due to a decrease in personnel and related costs of $2.5 million
associated with a decrease in headcount which was offset by an increase in
third
party consulting costs of $2.1 million and third party PCS costs of $0.1
million. Service costs were able to remain constant while service revenue
increased due to improved utilization of our internal consultant teams,
replacing full time employees with third party consultants (converting a
fixed
cost to a variable cost) and increasing PCS revenue, which to a limited degree
is not based on a variable cost model, so there is not a direct relationship
of
revenue to costs.
Amortization
of Intangible Assets
(included in Cost of
Revenues). Amortization
of intangible assets cost
consists primarily of the amortization of amounts paid for developed
technologies, customer lists and trade-names resulting from business
acquisitions. The following table sets forth our costs associated with
amortization of intangible assets for the years ended September 30, 2007
and
2006 (in thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2007
|
2006
|
Change
|
%
|
||||||||||||||
|
Amortization
of intangible assets
|
$
|
1,211
|
$
|
1,211
|
$
|
—
|
—
|
%
|
|||||||||
|
Percentage
of total revenue
|
1
|
%
|
1
|
%
|
|||||||||||||
These
costs are solely related to the $6.1 million of intangible assets associated
with the acquisition of KiQ in December 2004. We expect amortization expense
for
intangible assets to be $1.2 million in fiscal year 2008, $1.2 million in
fiscal
year 2009 and $0.3 million in fiscal year 2010.
Operating
Expenses
Sales
and Marketing. Sales and marketing expenses is composed primarily of costs
associated with selling, promoting and advertising our products, product
demonstrations and customer sales calls. These costs consist primarily of
employee salaries, commissions and bonuses, benefits, facilities, travel
expenses and promotional and advertising expenses. The following table sets
forth our sales and marketing expenses in terms of absolute dollars for the
years ended September 30, 2007 and 2006 (in thousands, except
percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2007
|
2006
|
Change
|
%
|
||||||||||||||
|
Sales
and marketing costs
|
$
|
32,597
|
$
|
33,616
|
$
|
(1,019
|
)
|
(3
|
)%
|
||||||||
|
Percentage
of total revenue
|
26
|
%
|
34
|
%
|
|||||||||||||
Sales
and marketing expenses decreased $1.0 million or 3% for the year ended
September 30, 2007 as compared to the same period of the prior year. The
primary
reason for the decrease was due to a decrease of $1.5 million in personnel
related costs and a decrease of $0.4 million in travel costs offset by
an increase of $0.7 million in sales and marketing program costs. The decrease
in personnel costs is mainly attributed to a 22% decrease in average headcount
year-over-year.
Research
and Development. Research and development expenses is
composed primarily of costs associated with the development of new products,
enhancements of existing products and quality assurance activities. These
costs
consist primarily of employee salaries and benefits, facilities, the cost
of
software and development tools and equipment and consulting costs, including
costs for offshore consultants. The following table sets forth our research
and
development expenses in terms of absolute dollars for the years ended September
30, 2007 and 2006 (in thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2007
|
2006
|
Change
|
%
|
||||||||||||||
|
Research
and development costs
|
$
|
27,546
|
$
|
25,858
|
$
|
1,688
|
7
|
%
|
|||||||||
|
Percentage
of total revenue
|
22
|
%
|
27
|
%
|
|||||||||||||
Research
and development expense increased $1.7 million or 7% for the year ended
September 30, 2007 as compared to the same period of the prior year. The
primarily reason for the increase was due to a $3.4 million increase in
personnel related expense offset by a decrease of $1.6 million in third party
consulting costs and a decrease of $0.2 million in travel costs.
The
increase
in personnel costs was driven by a 13% increase in average headcount for
the
comparative periods. Third party consulting costs decreased as the result
of the
completion of a large co-development project in September 2006 that utilized
a
large number of outside consultants.
General
and Administrative. General and administrative expenses
is composed primarily of costs associated with our executive and administrative
personnel (e.g. the CEO, legal, human resources and finance personnel). These
costs consist primarily of employee salaries, bonuses, stock compensation
expense, benefits, facilities, professional fees, including costs for
Sarbanes-Oxley Act of 2002 (SOX) consultants and the recently concluded stock
option review. The following table sets forth our general and administrative
expenses in terms of absolute dollars for the years ended September 30, 2007
and
2006 (in thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2007
|
2006
|
Change
|
%
|
||||||||||||||
|
General
and administrative costs
|
$
|
19,898
|
$
|
20,445
|
$
|
(547
|
)
|
(3
|
)%
|
||||||||
|
Percentage
of total revenue
|
16
|
%
|
21
|
%
|
|||||||||||||
General
and administrative expense decreased $0.5 million or 3% for the year ended
September 30, 2007 as compared to the same period of the prior year. This
decrease is primarily due to a decrease of $0.6 million in professional fees
and
a decrease of $0.3 million in personnel and related costs offset by an increase
of $0.4 million in other miscellaneous costs of which $0.2 million of the
miscellaneous costs were related to U.S. state franchise taxes.
Restructuring
Expense. In October 2006, we initiated a restructuring plan that
included an immediate reduction in positions of slightly more than ten percent
of the Company's workforce, consolidation of our European facilities, and
the
closure of our French office. A majority of the positions eliminated were
in
Europe. We recorded a pre-tax cash restructuring expense of $6.1 million
as
calculated using the net present value of the related costs as required by
SFAS
146. The expense was composed of $1.8 million for severance costs and $4.4
million for exiting excess facilities of which $1.0 million of the excess
facility expense is associated with non-cash charges for the write-off of
leasehold improvements and the reversal of a favorable purchase price adjustment
related to the France office lease. We anticipated that $5.1 million of the
expense would result in cash expenditures. As of September 30, 2007, we have
paid $2.7 million in cash payments and expect to pay the remaining $2.5 million
during the first six months of fiscal year 2008.
During
fiscal year 2002, we restructured several areas of the Company to reduce
expenses and improve revenues. As part of this restructuring, we closed an
office facility in Boston, Massachusetts and recorded an expense associated
with
the long term lease which expires in January 2011. During 2007, we completed
a
new sublease for this facility with a new sub-tenant for the remaining term
of
our lease at a rate lower than that which was forecasted when the original
restructuring expense was recorded in 2002. This change in estimate resulted
in
an additional $0.4 million in restructuring expenses for the year ended
September 30, 2007.
Stock-based
Compensation (included in
individual Operating Expense and
Cost of Revenue
Categories). The following table sets forth our
stock-based compensation expense in terms of absolute dollars and functional
breakdown for the years ended September 30, 2007 and 2006 (in
thousands):
|
Years
Ended September 30,
|
|||||||||
|
2007
|
2006
|
|
|||||||
|
Stock-based
compensation expense:
|
|||||||||
|
Cost
of revenues
|
$
|
313
|
$
|
248
|
|||||
|
Sales
and marketing
|
|
744
|
|
2,327
|
|||||
|
Research
and
development
|
|
546
|
|
332
|
|||||
|
General
and
administrative
|
1,417
|
|
1,788
|
||||||
|
|
Total
stock-based compensation
expense
|
$
|
3,020
|
$
|
4,695
|
||||
For
the year ended September 30, 2007, the aggregate stock-based compensation
cost
included in cost of revenues and in operating expenses was $3.0 million which
is
a combination of $2.8 million related to stock options and $0.2 million
associated with restricted stock awards. For the year ended September 30,
2006, the aggregate stock-based compensation cost included in cost of revenues
and in operating expenses was $4.7 million which was a combination of $2.7
million related to stock options and $2.0 million associated with restricted
stock awards. The decrease in total compensation expense of $1.7 million
year-over-year is primarily attributed to a reduction in restricted stock
expense of $1.8 million, of which $1.0 million of the reduction is due to
the
restricted stock associated with the KIQ acquisition which became fully
amortized during 2007. The remaining decrease is the result of restricted
stock
cancellations granted in prior years to two key executives who left the company
in the quarter ending December 2006.
Interest
Income,
Net. Interest
income, net,
consists primarily of interest income generated from our cash, cash equivalents
and marketable securities, offset by interest expense incurred in connection
with our capital leases and letters of credit and imputed under SFAS 146
restructuring accruals. The following table sets forth our interest income,
net,
in terms of absolute dollars for the years ended September 30, 2007 and 2006
(in
thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2007
|
2006
|
Change
|
%
|
||||||||||||||
|
Interest
income, net
|
$
|
2,198
|
$
|
1,120
|
$
|
1,078
|
96
|
%
|
|||||||||
|
Percentage
of total revenue
|
2
|
%
|
1
|
%
|
|||||||||||||
Interest
income, net, increased $1.1 million or 97% for the year ended September 30,
2007
as compared to the same period of the prior year. This increase is primarily
due
to improved interest rates related to interest-bearing cash and cash equivalents
accounts and a higher average cash balance during 2007 as compared to 2006.
In addition, during the quarter ended June 30, 2007, a portion of our funds
were
transferred into marketable securities which earned a higher return of interest
than other investments we utilized in the prior year. During the quarter
ended
June 30, 2007, the capital equipment lease obligations were paid in full
and the
associated interest expense was eliminated.
Other
Income (Expense),
Net. These
gains and losses
are primarily associated with foreign currency transaction gains or losses
and
the re-measurement of our short-term intercompany balances between the U.S.
and
our foreign subsidiaries with different functional currencies than the U.S.
Dollar. The following table sets forth our other income (expense), net in
terms
of absolute dollars for the years ended September 30, 2007 and 2006 (in
thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2007
|
2006
|
Change
|
%
|
||||||||||||||
|
Other
income (expense), net
|
$
|
822
|
$
|
(627
|
)
|
$
|
1,449
|
231
|
%
|
||||||||
|
Percentage
of total revenue
|
1
|
%
|
—
|
%
|
|||||||||||||
Other
income increased $1.4 million or 231% for the year ended September 30, 2007
as
compared to the same period of the prior year primarily due to transaction
gains
as well as gains associated with the re-measurement of our short-term
intercompany balances. The intercompany gains are due to the majority of
our
subsidiaries holding net payable balances due to the U.S., denominated in
U.S.
Dollars; consequently, during the year as the Euro and the British Pound
increased in strength against the U.S. Dollar, foreign currency gains
resulted.
Provision
for Income Taxes. Our provision
for income taxes is $1.6 million and $0.6 million for the years ended
September 30, 2007 and 2006, respectively. The $1.0 million increase in
income taxes is primarily due to $0.8 million of unrecoverable withholding
tax payments related to sales transactions that occurred in Turkey and Poland
during the year ended September 30, 2007. The remainder of our provision
is
attributable to taxes on earnings from our foreign subsidiaries, U.S. federal
alternative minimum taxes and certain U.S. state income taxes.
Our
deferred tax assets primarily consist of net operating loss carryforwards,
nondeductible allowances and research and development tax credits. We have
recorded a valuation allowance for the full amount of our net deferred tax
assets, as the future realization of the tax benefit is not considered by
management to be more-likely-than-not.
Comparison
of the Year Ended September 30, 2006 to the Year Ended September 30,
2005
Revenues
License
Revenue. The increase or decrease of license
revenue occurring within the three different product emphases is dependent
on
the timing of when a sales transaction is completed and whether a license
transaction was sold with essential consulting services. Products licensed
with
essential consulting services are generally recognized as revenue under the
percentage-of-completion method of accounting. The timing and amount of revenue
for those transactions being recognized under the percentage-of-completion
is
influenced by the progress of work performed relative to the project length
of
customer contracts and the dollar value of such contracts. The following
table sets forth our license revenue by product emphasis for the years ended
September 30, 2006 and 2005 (in thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2006
|
2005
|
Change
|
%
|
||||||||||||||
|
License
Revenue:
|
|||||||||||||||||
|
Enterprise
solutions
|
$
|
30,351
|
$
|
24,587
|
$
|
5,764
|
23
|
%
|
|||||||||
|
Marketing
solutions
|
|
6,396
|
|
2,450
|
|
3,946
|
161
|
|
|||||||||
|
Decision
management solutions
|
3,767
|
4,641
|
(874
|
)
|
(19
|
)
|
|||||||||||
|
Total
license revenue
|
$
|
40,514
|
$
|
31,678
|
$
|
8,836
|
28
|
%
|
|||||||||
Total
license revenue increased $8.8 million, or 28%, to $40.5 million for the
year
ended September 30, 2006 compared to $31.7 million for the year ended September
30, 2005. License revenues for enterprise solutions increased $5.8 million,
or
23%, to $30.4 million for the year ended September 30, 2006 compared to
$24.6 million for the year ended September 30, 2005. This increase was
primarily due to an increase in value of the average customer transaction.
License revenues for marketing solutions increased $3.9 million, or 161%,
to
$6.4 million for the year ended September 30, 2006 compared to $2.5 million
for the year ended September 30, 2005. License revenues for decision
management solutions relate to the products acquired in the KiQ transaction.
License revenues for decision management solutions decreased $0.8 million,
or
19% to 3.8 million for the year ended September 30, 2006 compared to $4.6
million for year ended September 30, 2005.
Service
Revenue. Service revenue is primarily composed of consulting
implementation and integration, consulting customization, training,
post-contract customer support services, and certain reimbursable out-of-pocket
expenses. The increase or decrease of service revenue within the three different
product emphases is primarily due to the timing of when license transactions
are
completed, whether or not the license was sold with essential consulting
services, the sophistication of the customer’s application, and the expertise of
the customer’s internal development team. For other service transactions,
service revenue will lag in timing compared to the period of when the license
revenue is recognized. The following table sets forth our service revenue
by
product emphasis for the years ended September 30, 2006 and 2005 (in thousands,
except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2006
|
2005
|
Change
|
%
|
||||||||||||||
|
Service
Revenue:
|
|||||||||||||||||
|
Enterprise
solutions
|
$
|
39,911
|
$
|
40,441
|
$
|
(530
|
)
|
(1
|
)%
|
||||||||
|
Marketing
solutions
|
|
12,996
|
|
9,680
|
|
3,316
|
34
|
|
|||||||||
|
Decision
management solutions
|
4,115
|
1,926
|
2,189
|
114
|
|||||||||||||
|
Total
license revenue
|
$
|
57,022
|
$
|
52,047
|
$
|
4,975
|
10
|
%
|
|||||||||
Total
service revenue, which includes reimbursement of out-of-pocket expenses,
increased $5.0 million, or 10%, to $57.0 million for the year ended
September 30, 2006 compared to $52.0 million for the year ended
September 30, 2005. This increase is primarily related to a $2.3 million
increase in support and maintenance revenue, a $2.1 million increase in training
revenue and a $0.5 million increase in consulting revenue. Service
revenue associated with enterprise solution products decreased
$0.5 million, or 1%, to $39.9 million for the year ended September 30,
2006 compared to $40.4 million for the year ended September 30, 2005.
Service revenues associated with marketing solution products increased $3.3
million, or 34%, to $13.0 million for the year ended September 30, 2006
compared to $9.7 million for the year ended September 30, 2005. Service
revenues associated with decision management solution products relate to
the
products acquired in the KiQ transaction. Service revenues associated with
decision management increased $2.2 million or 114% to $4.1 million for the
year
ended September 30, 2006 compared to $1.9 million for the year ended
September 30, 2005.
Reimbursement
of out-of-pocket expenses (which are included in total service revenues)
decreased $0.2 million, or 4%, to $3.3 million for the year ended
September 30, 2006 compared to $3.5 million for the year ended
September 30, 2005.
Cost
of Revenues
License.
Cost of license revenues includes third party software royalties and
amortization of capitalized software development costs. Royalty expenses
can
vary depending upon the mix of products sold within the period. The capitalized
software development costs pertain to a banking product that was completed
and
available for general release in August 2005. Annual amortization expense
associated with this product is $0.9 million. Amortization of these costs
is
expected through 2008. The following table sets forth our cost of license
revenues for the years ended September 30, 2006 and 2005 (in thousands, except
percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2006
|
2005
|
Change
|
%
|
||||||||||||||
|
Cost
of license revenue
|
$
|
1,690
|
$
|
1,079
|
$
|
611
|
57
|
%
|
|||||||||
|
Percentage
of total revenue
|
2
|
%
|
1
|
%
|
|||||||||||||
Cost
of license revenues increased $0.6 million, or 57%, to $1.7 million for the year
ended September 30, 2006 compared to $1.1 million for the year ended
September 30, 2005. This increase is primarily related to the fiscal year
2006 including a full year of amortization related to the banking product
versus
the prior year which included only 1.5 months of amortization. These costs
resulted in license gross margins of approximately 96% and 97% for the years
ended September 30, 2006 and 2005, respectively.
Service. Cost
of service revenues consists primarily of personnel, third party
consulting, facility and travel costs incurred to provide consulting
implementation and integration, consulting customization, training, PCS support
services. The following table sets forth our cost of service revenues for
the years ended September 30, 2006 and 2005 (in thousands, except
percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2006
|
2005
|
Change
|
%
|
||||||||||||||
|
Cost
of service revenue
|
$
|
30,566
|
$
|
30,155
|
$
|
411
|
1
|
%
|
|||||||||
|
Percentage
of total revenue
|
31
|
%
|
36
|
%
|
|||||||||||||
Cost
of service revenues increased $0.4 million, or 1%, to $30.6 million for the
year
ended September 30, 2006 compared to $30.2 million for the year ended
September 30, 2005. This increase in costs is primarily due to increases in
personnel related costs of $0.7 million related to an increase in headcount,
facility and information technology costs of $0.6 million, third party support
and maintenance costs of $0.3 million offset by a decrease in third party
consulting costs of $1.5 million. These costs resulted in service gross margins
of approximately 46% and 42% for the years ended September 30, 2006 and
2005, respectively.
Amortization
of Intangible Assets (included in
Cost of Revenues).
Amortization
of
intangible assets cost consists primarily of the amortization of amounts
paid
for developed technologies, customer lists and trade-names resulting from
business acquisitions. The following table sets forth our costs associated
with
amortization of intangible assets for the years months ended September 30,
2006
and 2005 (in thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2006
|
2005
|
Change
|
%
|
||||||||||||||
|
Amortization
of intangible assets
|
$
|
1,211
|
$
|
1,068
|
$
|
143
|
13
|
%
|
|||||||||
|
Percentage
of total revenue
|
1
|
%
|
2
|
%
|
|||||||||||||
Amortization
of intangible assets was $1.2 million for the year ended September 30,
2006 compared to $1.1 million for the year ended September 30, 2005. The
amortization expense in the year ended September 30, 2006 is solely related
to $6.1 million of intangible assets associated with the acquisition of KiQ
in
December 2004. The amortization for 2005 includes a partial year of KiQ related
amortization. We expect to continue to amortize these assets through December
2009.
Operating
Expenses
Sales
and Marketing. Sales and marketing expenses is composed primarily of costs
associated with selling, promoting and advertising our products, product
demonstrations and customer sales calls. These costs consist primarily of
employee salaries, commissions and bonuses, benefits, facilities, travel
expenses and promotional and advertising expenses. The following table sets
forth our sales and marketing expenses in terms of absolute dollars for the
years ended September 30, 2006 and 2005 (in thousands, except
percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2006
|
2005
|
Change
|
%
|
||||||||||||||
|
Sales
and marketing costs
|
$
|
33,616
|
$
|
29,561
|
$
|
4,055
|
14
|
%
|
|||||||||
|
Percentage
of total revenue
|
34
|
%
|
36
|
%
|
|||||||||||||
Sales
and marketing expenses increased $4.0 million, or 14%, to $33.6 million for
the
year ended September 30, 2006 compared to $29.6 million for the year ended
September 30, 2005. The $4.0 million increase in these expenses was
mainly attributable to an increase of $2.7 million in personnel related
expenses, $1.0 million in sales events, and $0.3 million increase in legal
contract and personnel costs.
Research
and Development. Research and development expenses is
composed primarily of costs associated with the development of new products,
enhancements of existing products and quality assurance activities. These
costs
consist primarily of employee salaries and benefits, facilities, the cost
of
software and development tools and equipment and consulting costs, including
costs for offshore consultants. The following table sets forth our research
and
development expenses in terms of absolute dollars for years ended September
30,
2006 and 2005 (in thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2006
|
2005
|
Change
|
%
|
||||||||||||||
|
Research
and development costs
|
$
|
25,858
|
$
|
20,272
|
$
|
5,586
|
28
|
%
|
|||||||||
|
Percentage
of total revenue
|
27
|
%
|
24
|
%
|
|||||||||||||
Research
and development expenses increased $5.6 million, or 27%, to $25.9 million
for
the year ended September 30, 2006 compared to $20.3 million for the year
ended September 30, 2005. This increase was driven by two large
co-development projects; one in North America and one in the United Kingdom.
The
United Kingdom project was completed in September 2006 and the North America
project was completed in the second half of 2007. This $5.6 million increase
in
costs was primarily composed of $6.6 million in consulting expenses related
to
our outsourcing of technical support and certain sustaining engineering
functions and $0.4 million in travel costs which were offset by decreases
of
$1.1 million in personnel costs and $0.3 million in information technology
costs.
General
and Administrative. General and administrative expenses
is composed primarily of costs associated with our executive and administrative
personnel (e.g. the CEO, human resources, legal and finance personnel). These
costs consist primarily of employee salaries, bonuses, stock compensation
expense, benefits, facilities, consulting costs, including costs for
Sarbanes-Oxley Act of 2002 (SOX) consultants and the recently concluded stock
option review. The following table sets forth our general and administrative
expenses in terms of absolute dollars for the years ended September 30, 2006
and
2005 (in thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2006
|
2005
|
Change
|
%
|
||||||||||||||
|
General
and administrative costs
|
$
|
20,445
|
$
|
18,549
|
$
|
1,896
|
10
|
%
|
|||||||||
|
Percentage
of total revenue
|
21
|
%
|
22
|
%
|
|||||||||||||
General
and administrative expenses increased $1.9 million, or 10%, to $20.4 million
for
the year ended September 30, 2006 compared to $18.5 million for the year
ended September 30, 2005. The increase in costs is primarily due to
increases of $3.4 million for personnel costs, $0.7 million for severance
costs
associated with two senior executives, offset by a reduction of $2.3 million
in
professional services for consultants. The increase in personnel costs and
decrease in professional services was driven by the replacement of accounting
consultants with permanent employees. The decrease in professional services
was
also due to a decrease in SOX consulting fees of $2.7 million which was offset
by stock option review professional fees of $1.2 million during the year.
We did
not experience the same level of decrease in SOX costs in 2007 that we did
in
2006. The costs associated with the stock option review continued in the
first
half of 2007.
Amortization
of Intangible Assets (included in
Operating Expenses).
There
was no
amortization of intangible assets included in operating costs for 2006. All
intangible assets attributable to operating expenses were fully amortized
in
2005. Amortization of intangible assets included in operating expenses was
$0.1
million for the year ended September 30, 2005. These intangible assets were
the result of the Prime Response acquisition in March 2001.
Purchased
in-process Research and Development.
In-process research and development
expense represents acquired technology
that, on the date of acquisition, had not achieved technological feasibility
and
did not have an alternative future use, based on the state of development.
Because the product under development may not achieve commercial viability,
the
amount of acquired in-process research and development was immediately expensed.
The nature of the efforts required to develop the purchased in-process research
and development into a commercially viable product principally relate to
the
completion of all planning, designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced
to
meet its designed specifications, including functions, features and technical
performance requirements. There was no purchased in-process research and
development expense for the year ended September 30, 2006. For the year
ended September 30, 2005, we recorded an expense of $1.9 million related to
acquired in-process technology attributable to the acquisition of
KiQ.
Restructuring
Expenses. In July 2005, we announced a reduction in
workforce and incurred a one-time cash expense of approximately $1.1 million
in
the year ended September 30, 2005. Please refer to Note 6 to the
Consolidated Financial Statements for further discussion.
Stock-based
Compensation (included in Individual
Operating Expense
and Cost
of Revenue Categories). The following
table sets forth our stock-based compensation expense in terms of absolute
dollars and functional breakdown for the years ended September 30, 2006 and
2005
(in thousands):
|
Years
Ended September 30,
|
|||||||||
|
2006
(under
SFAS 123®)
|
2005
(under
SFAS 123/APB 25)
|
|
|||||||
|
Stock-based
compensation expense:
|
|||||||||
|
Cost
of revenues
|
$
|
248
|
$
|
690
|
|||||
|
Sales
and marketing
|
|
2,327
|
|
986
|
|||||
|
Research
and
development
|
|
332
|
|
843
|
|||||
|
General
and
administrative
|
1,788
|
|
512
|
||||||
|
|
Total
stock-based compensation
expense
|
$
|
4,695
|
$
|
3,031
|
||||
For
the year ended September 30, 2006, the aggregate stock-based compensation
cost
included in cost of revenues and in operating expenses was $4.7 million which
is
a combination of $2.7 million related to stock options and $2.0 million
associated with restricted stock awards. Included in the restricted stock
award
compensation expense of $2.0 million is $1.2 million associated with the
amortization of restricted stock awards attributable to the KiQ acquisition
in
December 2004. Amortization of deferred stock-based compensation
attributable to the acquisition of KiQ was expensed through June
2007.
For
the year ended September 30, 2005, the aggregate stock-based compensation
cost
included in cost of revenues and in operating expenses was $3.0 million which
was a combination of a $0.4 million benefit related to stock options and
$3.4
million expense associated with restricted stock awards. Included in the
restricted stock award compensation expense of $3.4 million is $2.7 million
associated with the amortization of restricted stock awards attributable
to the
KIQ acquisition.
Interest
Income, Net. Interest income, net,
consists primarily of interest income generated from our cash and cash
equivalents, offset by interest expense incurred in connection with our capital
leases and letters of credit. The following table sets forth our interest
income, net, in terms of absolute dollars for the years ended September 30,
2006
and 2005 (in thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2006
|
2005
|
Change
|
%
|
||||||||||||||
|
Interest
income, net
|
$
|
1,120
|
$
|
755
|
$
|
365
|
48
|
%
|
|||||||||
|
Percentage
of total revenue
|
1
|
%
|
1
|
%
|
|||||||||||||
Interest
income, net, increased to approximately $1.1 million for the year ended
September 30, 2006 from $0.8 million for the year ended September 30,
2005. This increase is primarily due to improved interest rates related to
interest-bearing cash and cash equivalents accounts and a higher average
cash
balance during 2006 versus 2005.
Other
Income (Expense),
Net. These
gains and losses
are primarily associated with foreign currency transaction gains or losses
and
the re-measurement of our short-term intercompany balances between the U.S.
and
our foreign denominated subsidiaries. The following table sets forth our
other
income (expense), net in terms of absolute dollars for the years ended September
30, 2006 and 2005 (in thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2006
|
2005
|
Change
|
%
|
||||||||||||||
|
Other
income (expense), net
|
$
|
(627
|
)
|
$
|
(103
|
)
|
$
|
(524
|
)
|
(509
|
)%
|
||||||
|
Percentage
of total revenue
|
—
|
%
|
—
|
%
|
|||||||||||||
Other
expense was $0.6 million for the year ended September 30, 2006 as compared
to $0.1 million for the same period in the prior year. The change is primarily
attributable to currency exchange gains and losses recognized during the
years
ended September 30, 2006 and 2005. These gains and losses are primarily
associated with our U.S. Dollar account balances held in Europe and the U.S.
Dollar’s fluctuations in value against the Euro and U.K. Pound
Sterling.
Provision
for Income Taxes. Our provisions for
income taxes were $0.6 million and $0.4 million for the years ended
September 30, 2006 and 2005, respectively. The provisions were attributable
to taxes on earnings from our foreign subsidiaries and certain state income
taxes.
Our
deferred tax assets primarily consist of net operating loss carryforwards,
nondeductible allowances and research and development tax credits. We have
recorded a valuation allowance for the full amount of our net deferred tax
assets, as the future realization of the tax benefit is not considered by
management to be more-likely-than-not.
Liquidity
and Capital Resources
Prior
to the year ended September 30, 2007, we have not been profitable and we
have
financed any shortfall from our operating activities through the issuance
of our
common stock. Currently, in addition to generating profit for the year, we
have
generated $38.9 million cash from operations for the year ended September
30,
2007. It is anticipated that we will continue to generate cash from operations
or financing activities in excess of the cash requirements in the near
term.
Our
cash, cash equivalents, restricted cash are principally held in operating
accounts, money market accounts, commercial paper and certificates of deposit
and our marketable securities are invested in corporate bonds and commercial
paper. The balances of these accounts totaled $90.5 million and $45.8 million
at
September 30, 2007 and 2006, respectively, an increase of $44.7 million,
or
98%.
|
|
Operating
Activities
|
Cash
provided by operating activities was $38.9 million during the year ended
September 30, 2007, which consisted primarily of our net income of $6.0
million adjusted for non-cash items (depreciation, amortization, non-cash
stock-based compensation expense, provision for doubtful accounts, loss on
disposal of assets and other non-cash charges) aggregating approximately
$7.8
million and the net cash inflow effect from changes in assets and liabilities
of
approximately $25.1 million. This net cash inflow effect from changes in
assets
and liabilities was primarily related to changes in deferred revenue of $36.6
million offset by changes in accounts receivable of $11.8 million The increase
in deferred revenue is the result of sales transactions that were completed
during the year ended September 30, 2007 for which revenue will not be
recognized until subsequent periods.
Cash
provided by operating activities was $3.2 million during the year ended
September 30, 2006, which consisted primarily of our net loss of $16.0
million adjusted for non-cash items (depreciation, amortization, non-cash
stock-based compensation expense, provision for doubtful accounts, loss on
disposal of assets and other non-cash charges) aggregating approximately
$8.2
million and the net cash inflow effect from changes in assets and liabilities
of
approximately $11.0 million. This net cash inflow was primarily caused by
an
increase in liability balances for accrued expenses and other liabilities
of
$6.1 million, accounts payable of $3.0 million and deferred revenue of $2.8
million offset by cash outflows related to an increase in prepaid expenses
of
$1.0 million. The increase in accrued expenses, other liabilities and accounts
payable is primarily due to the timing of when the payments were made for
these
liabilities. The increase in deferred revenue was primarily due to an increase
in deferred license revenue for the year.
Cash
used in operating activities was $9.0 million during the year ended
September 30, 2005, which consisted primarily of our net loss of $19.9
million adjusted for non-cash items (primarily the write off of in-process
research and development costs associated with the KiQ acquisition,
depreciation, amortization, non-cash stock-based compensation expense and
other
non-cash charges) aggregating approximately $7.9 million and the net cash
inflow
effect from changes in assets and liabilities of approximately $3.1 million.
This net cash inflow was primarily caused by an increase in revenue and the
collection of accounts receivable, offset by the payment of accounts payable
and
accrued expenses, and additions to prepaid expenses and other assets. The
increase in deferred revenue is primarily attributable to two significant
license agreements signed in the three month period ended June 30, 2005.
These agreements were accounted for under the percentage of completion method
of
accounting.
|
|
Investing
Activities
|
Cash
used in investing activities during the year ended September 30, 2007 was
$14.9
million. The cash was used primarily for the purchase of $18.0 million of
marketable securities, the purchase of $2.8 million of property and equipment,
and the capitalization of $0.3 million of software development costs associated
with the porting an existing product to a new platform. This use of cash
was
offset by $6.0 million of proceeds from the maturity of marketable securities
and the release of $0.2 million of restricted cash during the period. The
majority of the property and equipment purchased was associated with the
closure
of the old European headquarters office and the opening of the new smaller
European headquarters office during the period. The remainder of the property
and equipment purchases was primarily computer equipment use in for day-to-day
operations.
Cash
used in investing activities during the year ended September 30, 2006 was
less than $0.1 million. The cash used primarily related to the purchase of
$1.7 million of property and equipment and the capitalization of $0.3 million
of
software development costs associated with the porting an existing product
to a
new platform. This use of cash was offset by the release of $1.9 million
of
restricted cash during the period.
Cash
used in investing activities during the year ended September 30, 2005 was
$8.8 million. This use of cash primarily related to the $9.8 million in
funds used to acquire KiQ, $2.2 million in funds used to complete
development of an acquired banking product offset by the $4.0 million in net
proceeds from the sale of marketable securities. Property and equipment
purchases also consumed $0.7 million of cash during the period.
|
|
Financing
Activities
|
Financing
activities were a source of cash in the amounts of $6.2 million, $2.0 million,
and $1.0 million for the year ended September 30, 2007, 2006 and 2005,
respectively.
For
the year ended September 30, 2007, the amount relates to $6.2 million in
proceeds from stock option exercises and $0.1 million from excess tax benefits
from stock based compensation, offset by payments of $0.1 million on capital
lease obligations. We paid off the remainder of the capital lease obligations
during the year ended September 30, 2007.
For
the year ended September 30, 2006, the amount relates to $2.2 million in
proceeds from stock option exercises, offset by payments of $0.2 million
on
capital lease obligations.
For
the year ended September 30, 2005, the amount relates to $1.2 million in
proceeds from stock option exercises, offset by payments of $0.2 million
on
capital lease obligations. During the year ended September 30, 2005, we
suspended our Employee Stock Purchase Plan, or ESPP. Historically, proceeds
to
us from the ESPP have been significant. The ESPP is not expected to be
reinstated and, accordingly, we do not anticipate that we will receive proceeds
from the ESPP in the near term.
Revolving
Line of Credit
The
Company’s revolving line of credit with Comerica Bank was amended and restated
on March 8, 2006 and was extended to March 7, 2008. The terms of the agreement
include a $5.0 million line of credit and require us to maintain (i) at least
a
$5.0 million cash balance in Comerica Bank accounts, (ii) a minimum quick
ratio
of 2 to 1, (iii) a liquidity ratio of at least 1 to 1 at all times, and (iv)
subordinate any debt issuances subsequent to the effective date of the
agreement, and certain other covenants. All assets of the Company have been
pledged as collateral on the credit facility. Due to the Company’s failing to
timely file its periodic reports on Form 10-K for the year ended September
30,
2006 and on Form 10-Q for the quarter ended June 30, 2006, the line of credit
agreement was amended in August 2006, November 2006, and December 2006 to
extend
the deadline related to the filing of its periodic reports to February 20,
2007.
As of February 14, 2007, the Company became current with its SEC regulatory
filings and has remained current for filings thereafter.
The
revolving line of credit contains a provision for a sub-limit of up to $5.0
million for issuances of standby commercial letters of credit. As of September
30, 2007, we had utilized $0.3 million of the standby commercial letters
of
credit limit of which $0.3 million serves as collateral for computer equipment
leases for Ness (see Note 9 to the Consolidated Financial Statements). The
revolving line of credit also contains a provision for a sub-limit of up
to $3.0
million for issuances of foreign exchange forward contracts. As of September
30,
2007, we had not entered into any foreign exchange forward contracts. Pursuant
to the amendment in March 2006, we are required to secure the standby commercial
letters of credit and foreign exchange forward contracts through March 7,
2008.
If these have not been secured to Comerica Bank’s satisfaction, our cash and
cash equivalent balances held by Comerica Bank automatically secure such
obligations to the extent of the then continuing or outstanding and undrawn
letters of credit or foreign exchange contracts.
Borrowings
under the revolving line of credit bear interest at the lending bank’s prime
rate. Except for the standby commercial letters of credit, as of September
30,
2007, there was no outstanding balance on the revolving line of credit. Advances
are available on a non-formula basis up to $5.0 million.
45