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
For
the fiscal year ended September 30, 2008
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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(I.R.S.
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 x No
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 (§229.405 of this chapter) 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
Form 10-K or any amendment to this Form 10-K.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large
accelerated filer
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Accelerated
filer x
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Non-accelerated
filer (Do not check if a smaller reporting
company)
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Smaller
reporting company
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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, 2008, the last business day of the registrant’s most recently completed
second fiscal quarter: $192,153,017.
As
of November 12, 2008, there were 30,076,478 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 2009 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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23
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Item
2.
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23
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Item
3.
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23
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Item
4.
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25
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Item
5.
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26
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Item
6.
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28
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Item
7.
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29
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Item
7A.
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50
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Item
8.
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52
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Item
9.
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91
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Item
9A.
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91
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Item
9B.
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94
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Item
10.
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94
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Item
11.
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94
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Item
12.
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94
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Item
13.
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94
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Item
14.
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94
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Item
15.
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95
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102
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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 designed
to improve the “customer experience” in front-office processes for leading
global companies primarily in the insurance, healthcare, telecommunications and
financial services markets. Chordiant provides companies in these markets with
innovative solutions designed to 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 improving their customer retention, reducing operational costs,
reducing their risk exposure, and increasing employee productivity. These
improvements may be realized by automating key business processes and supporting
organizational decision-making associated with the servicing, selling,
marketing, approval, and fulfillment of customer requests across the enterprise.
We offer solutions to our clients that include software applications, business
processes, tools and services that can 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.
We
have developed and acquired decision management systems 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. Our patented technology enables 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. 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 target vertical markets of
insurance, healthcare, telecommunications, and financial
services:
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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 designed 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: This
suite of product provides applications designed to drive 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:
This product is designed to provide 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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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
applications 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.
These applications are 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: This guided
desktop product is designed to support financial transaction
components for retail bank tellers/cashiers or other cash-based desktop
applications. Chordiant Teller 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) to provide company-wide case management,
customer history, and work management between front office and back office
operations.
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·
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Lending: This product consists
of solution components and services which are designed to 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: This product
consists of solution components and services which are designed to provide
a common process-driven insurance infrastructure and services across an
organization to increase efficiency of case management, claims processing,
quoting, self-service, 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 second generally
available release, consisting of advanced decisioning, was shipped in the
fourth quarter of fiscal year 2008. The product is designed to
make extensive use of Chordiant’s Decision Management (CDM)
technology to deliver real-time decisioning that helps collect on
overdue accounts while preserving the customer
relationship.
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Technology
Chordiant
technology is based on open 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 information 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.
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, Oracle (as a result of their acquisition of BEA
Systems), Sun Microsystems, and certain non-public entities. Our enterprise
platform solutions support industry standard J2EE application servers including
IBM WebSphere and Oracle WebLogic. Our server software runs on UNIX server
platforms from Sun Microsystems and IBM.
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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 is designed to allow 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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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 brand accounts through
helping them improve the quality of the customer experience they deliver in the
insurance, healthcare, telecommunications, and financial services 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 expects to 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., Deutsche Angestellten
Krankenkasse (DAK), 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 new Chordiant applications and expand their investment
in Chordiant products. For the fiscal year ended September 30, 2008, Citicorp
Credit Services Inc., and Vodafone Group Services Limited accounted for 22%
and 11% of our total revenues, respectively.
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 Global Services, Tata Consulting
Services, HCL Technologies, Cap Gemini, Accenture, systems integrators and
other 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 approximately three 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 and consultants in various additional locations in North America and
Europe. In fiscal year 2008, we added sales and services consultants in emerging
markets such as Russia and the Asia Pacific markets, including
Australia.
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, process
engineering guidance, project governance 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 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 2008,
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 and on-line customized training courses for a fee and, also, through
classroom, lab instructions, and e-learning. In addition, we provide
certification programs for our partners and customers.
Customer
Support
We
provide our customers with 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: Cap Gemini, Accenture, IBM Global Services, Ness
Technologies, Tata Consultancy Services, HCL Technologies, and Patni Telecom
Solutions (UK), LTD. We plan to expand these and/or other similiar 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, 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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·
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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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·
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Applications,
which includes our vertical and Marketing
Applications;
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·
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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 $25.6 million,
$27.5 million and $25.9 million for the years ended September 30,
2008, 2007, and 2006, 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
costs of internal development and total cost-of-ownership have risen to become a
primary concern of the business and management. In spite of current ongoing
efforts to reduce IT budgets, 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 the past years may indicate that we will face new
competitors in the future. In 2007 and 2008 IBM acquired ILOG, Cognos,
DataMirror and Watchfire Corporation; Oracle completed its acquisitions of
Hyperion, Moniforce and BEA Systems; Sun Microsystems acquired MySQL and SAP
acquired BusinessObjects, YASU Technologies and Pilot Software. While we do not
believe that ILOG, Cognos, DataMirror, Watchfire Corporation, Hyperion,
Moniforce, BEA Systems, MySQL, BusinessObjects, YASU Technologies, or Pilot
Software have been significant competitors of Chordiant in the past, the
acquisition of
these
companies by IBM, Oracle, Sun Microsystems and SAP may indicate that we will
face increased competition from 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.
In
fiscal year 2008, we neither filed for nor received patents. In 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 which covers the Decision Management
Suite.
Employees
As
of September 30, 2008, we employed 272 full time employees. Of that total, 85
were primarily engaged in product development, engineering or systems
engineering, 85 were engaged in sales and marketing, 47 were engaged in
professional services and 55 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 slowdown 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 negatively affect our operating results and cash
flows.”
Financial
Information about Segments
The
Company has one segment. For a detailed description of our revenues, profit and
loss, and total assets, we incorporate by reference the information in Item 6 of
this Annual Report on Form 10-K.
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 worldwide 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 or SEC, 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. Further, a copy of this
annual report on Form 10-K is located at the SEC’s Public Reference Room at 100
F Street, NE, Room 1580, Washington, D.C. 20549. Information on the operation of
the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding our filings at
http://www.sec.gov.
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RISK
FACTORS
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Recent
worldwide credit market turmoil may adversely affect our customers which
directly impacts our business and results of operations.
The
Company’s operations and performance depend on our customers having adequate
resources to purchase our products and services. The unprecedented turmoil in
the credit markets and the global economic downturn generally will adversely
impact our customers and potential customers. These economic conditions have
continued to deteriorate despite government intervention globally, and may
remain volatile and uncertain for the foreseeable future. Customers have altered
and may continue to alter their purchasing activities in response to lack of
credit, economic uncertainty and concern about the stability of markets in
general, and these customers may reduce, delay or terminate purchases of
our products and services or other sales activities that affect purchases of our
products and services. Recently,
many of our current and prior customers have merged with others, been forced to
raise significant amounts of capital, or received loans or equity investments
from the government which actions may result in less demand for our products and
services. If
we are unable to adequately respond to changes in demand resulting from
deteriorating economic conditions, our financial condition and operating results
may be materially and adversely affected.
We
are exposed to credit risk and payment delinquencies on our accounts receivable.
This risk is heightened during periods when economic conditions
worsen.
A
substantial majority of our outstanding accounts receivables are not covered by
collateral. In addition, our standard terms and conditions permit payment within
a specified number of days following the receipt of our product. While we have
procedures to monitor and limit exposure to credit risk on our receivables,
there can be no assurance such procedures will effectively limit our credit risk
and avoid losses. As economic conditions deteriorate, certain of our customers
may face liquidity concerns and may delay or be unable to satisfy their payment
obligations, which would have a material adverse effect on our financial
condition and operating results.
Our
cash and cash equivalents could be adversely affected if the financial
institutions in which we hold our cash and cash equivalents fail.
Our
cash and cash equivalents are highly liquid investments with original maturities
of three months or less at the time of purchase. We maintain the cash and cash
equivalents with reputable major financial institutions. Deposits with these
banks exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits
or similar limits in foreign jurisdictions. While we monitor daily the cash
balances in the operating accounts and adjust the balances as appropriate, these
balances could be impacted if one or more of the financial institutions with
which we deposit fails or is subject to other adverse conditions in the
financial or credit markets. To date we have experienced no loss or lack of
access to our invested cash or cash equivalents; however, we can provide no
assurance that access to our invested cash and cash equivalents will not be
impacted by adverse conditions in the financial and credit markets.
To
date, our sales have been concentrated in the insurance, healthcare,
telecommunications and financial services markets, and if we are unable to
continue sales in these markets or successfully penetrate new markets, our
revenues may decline.
Sales
of our products and services in several large markets—insurance, healthcare,
telecommunications and financial services, accounted for approximately 92% and
91% of our total revenues for the years ended September 30, 2008 and 2007,
respectively. We expect that revenues from these markets will continue to
account for a substantial portion of our total revenues for the foreseeable
future. However, we are seeking to expand in other markets. If we are unable to
successfully increase penetration of our existing markets or achieve sales in
additional markets, or if the overall economic conditions in our target markets
further deteriorates, our revenues may decline. Some of our current or
prospective customers, especially those in the financial services and insurance
industries, may face severe financial difficulties given their exposure to
deteriorating financial and credit markets, as well as the mortgage and
homebuilder sectors of the economy. This may cause our current or prospective
customers to reduce, delay or terminate their spending on technology, which in
turn would have an adverse impact on our sales and revenues.
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 revenue from a limited
number of customers. The loss of a major customer could cause a decrease in
revenues and net income. For the fiscal year ended September 30, 2008, Citicorp
Credit Services, Inc. and Vodafone Group Services Limited accounted for 22% and
11% of our total revenue, respectively. For the fiscal year ended September
30, 2007, Citicorp Credit Services, Inc. and International Business Machines
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 additional orders from existing
customers which may materially affect our operating results. The deteriorating
economic environment has resulted in failures of financial institutions and
significant consolidation within the financial services industry from which we
derive a significant portion of our customers and revenues. Accordingly, the
risk that we could lose a significant customer is exacerbated in the current
economic environment.
Historically,
some of our products and services have assisted companies in attracting and
retaining customers. To the extent financial institutions and other large
companies wish to shrink the size of their customer base, the demand for
these products may be reduced.
Some
of our customers have used our products to aggressively expand the size of their
customer base. Our marketing, decisioning and enterprise solutions have been
used to varying degrees on projects intended to manage leads, personalize
marketing campaigns and deliver highly effective sales messages. Due to the
current economic climate, many large financial institutions have been forced to
deleverage, sell parts of their businesses, or otherwise reduce the size of
their organizations. In these situations it is possible that the demand for our
products may be reduced, resulting in lower revenues in the future.
Over
the near term we plan to increase the focus of our sales staff towards
Decisioning Management products and reduce the focus on Enterprise Foundation
products to reflect market conditions. There can be no assurance that such a
migration will be fully successful.
Sales
of Enterprise Foundation solutions generally have a much higher cost to a
customer than Decisioning Management solutions. The magnitude of the
professional services required to implement Foundation projects is also much
higher and often can take long periods of time to complete. Decisioning products
are generally faster to implement and can produce a positive return on
investment in a shorter period of time. Due to the current economic
climate, our customers may focus on those projects that are smaller and faster
to complete. Accordingly, our sales force plans to increase their focus on
selling these types of solutions. This change in focus may not be successful
and, as a result, revenues may not meet our expectations.
Fluctuations
in the value of the U.S. dollar relative to foreign currencies could negatively
affect our operating results and cash flows.
A
significant portion of our sales and operating expenses result from transactions
outside of the U.S., often denominated in foreign currencies. These currencies
include the United Kingdom Pound Sterling, the Euro and the Canadian Dollar. Our
international sales comprised 48% of our total sales for the fiscal year
ended September 30, 2008. Our international sales comprised 47% of our total
sales for the fiscal year ended September 30, 2007. Our future operating
results, including cash and deferred revenue, will continue to be subject to
fluctuations in foreign currency rates, especially if international sales
increase as a percentage of our total sales, and we may be negatively impacted
by fluctuations in foreign currency rates in the future. For the fiscal
year ended September 30, 2008, we had a foreign currency transaction loss of
$0.3 million. See Item 7A Quantitative and Qualitative Disclosures about Market
Risk for further discussions.
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 may
include:
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Additional
deterioration and changes in domestic and foreign markets and economies,
including those impacted by the turmoil in the financial services,
mortgage and credit markets;
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Size
and timing of individual license
transactions;
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Delay,
deferral or termination of customer implementations of our products and
subsequent impact on revenues;
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Lengthening
of our sales cycle;
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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.
Low
gross margin in services revenues could adversely impact our overall gross
margin and income.
Our
services revenues have had lower gross margins than our license revenues.
Service revenue comprised 70% and 57% of our total revenues for the years ended
September 30, 2008 and 2007, respectively. Gross margin on service revenue was
57% for both years ended September 30, 2008 and 2007. License revenues
comprised 30% and 43% of our total revenues for the years ended September 30,
2008 and 2007, respectively. Gross margins on license revenues
were 97% for both years ended September 30, 2008 and 2007. 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. To increase services revenues,
we may expand our services organization, requiring us to 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. This expansion could further reduce gross margins in our services
revenues. In addition, given the current economic environment, customers and
potential customers may seek discounts on our services, or services at no
charge, which would further reduce our services gross margins and materially and
adversely affect our business, financial condition and results of
operations.
Our
revenues decreased in fiscal 2008 as compared to fiscal 2007 and until the
fiscal year ended September 30, 2007, we were not profitable, which may raise
vendor viability concerns about us thereby making it more difficult to
consummate license transactions with new and existing customers.
Our
revenues decreased materially in fiscal 2008 as compared to fiscal 2007. In
addition, while we were profitable for the years ended September 30, 2007 and
September 30, 2008, we were not profitable for the years prior to September 30,
2007. As of September 30, 2008, we had an accumulated deficit of $225.9 million.
We may incur losses in the future and cannot be certain that we can generate
sufficient revenues to continue to achieve profitability. Continued losses or
decreased revenues 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
vendor profitability and/or viability concerns, our revenues will decline, which
could further adversely affect our operating results. This concern over vendor
viability is exacerbated in the current economic environment.
Anti-takeover
provisions could make it more difficult for a third-party to acquire
us.
We
have adopted a stockholder rights plan and initially declared a dividend
distribution of one right for each outstanding share of common stock to
stockholders of record as of July 21, 2008. Each right entitles the holder
to purchase one one-hundredth of a share of our Series A Junior
Participating Preferred Stock for $20. Under certain circumstances, if a person
or group acquires 20 percent or more of our outstanding common stock,
holders of the rights (other than the person or group triggering their exercise)
will be able to purchase, in exchange for the $20 exercise price, shares of our
common stock or of any company into which we are merged having a value of $40.
The rights expire on July 21, 2011, unless extended by our Board of Directors.
Because the rights may substantially dilute the stock ownership of a person or
group attempting to take us over without the approval of our Board of Directors,
our rights plan could make it more difficult for a third-party to acquire us (or
a significant percentage of our outstanding capital stock) without first
negotiating with our Board of Directors regarding that acquisition.
In
addition, our Board of Directors has the authority to issue up to
51 million shares of Preferred Stock (of which 500,000 shares have been
designated as Series A Junior Participating Preferred Stock) and to fix the
designations and the powers, preferences and rights, and the qualifications,
limitations and restrictions thereof.
The
rights of the holders of our common stock may be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that may
be issued in the future. The issuance of Preferred Stock may have the effect of
delaying, deterring or preventing a change of control of Chordiant without
further action by the stockholders and may adversely affect the voting and other
rights of the holders of our common stock. Further, certain provisions of our
charter documents, including limiting the ability of stockholders to raise
matters at a meeting of stockholders without giving advance notice, may have the
effect of delaying or preventing changes in control or management of Chordiant,
which could have an adverse effect on the market price of our stock. In
addition, our charter documents do not permit cumulative voting, which may make
it more difficult for a third party to gain control of our Board of Directors.
Similarly, we have a classified Board of Directors whereby approximately
one-third of our Board members are elected annually to serve for three-year
terms, which may also make it more difficult for a third party to gain control
of our Board of Directors. Further, we are subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation
Law, which will prohibit us from engaging in a “business combination” with an
“interested stockholder” for a period of three years after the date of the
transaction in which the person became an interested stockholder, even if such
combination is favored by a majority of stockholders, unless the business
combination is approved in a prescribed manner. The application of
Section 203 also could have the effect of delaying or preventing a change
of control or management.
Our
known backlog of business may not result in revenue.
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. The risk that customers will reduce the
scope of, delay or terminate projects, thus delaying or eliminating our ability
to recognize backlog as revenue, is exacerbated in the current economic
environment.
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
three to eighteen 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 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 we may experience a net loss on that customer
engagement. 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. Certain of our customers
have become more cautious regarding their IT purchases given the
current economic conditions and specifically the issues that continue to
impact the financial and credit markets. The result is that our sales cycles
have lengthened in some instances, requiring more time to finalize transactions.
In particular, in each of the past several quarters transactions that we
expected to close before the end of the quarter were delayed or
suspended.
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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The
enterprise software industry continues to undergo consolidation in sectors of
the software industry in which we operate. For example, in 2007 and 2008, IBM
acquired ILOG, Cognos, DataMirror and Watchfire Corporation; Oracle
acquired Hyperion, Moniforce and BEA Systems; Sun Microsystems acquired MySQL;
and SAP acquired BusinessObjects, YASU Technologies and Pilot Software. While we
do not believe that ILOG, Cognos, DataMirror, Watchfire Corporation, Hyperion,
Moniforce, BEA Systems, MySQL, BusinessObjects, YASU Technologies, or Pilot
Software have been significant competitors of Chordiant in the past, the
acquisition of these companies by IBM, Oracle, Sun Microsystems and SAP may
indicate that we will face increased competition from larger and more
established entities in the future.
Many
of our competitors have greater resources, broader customer relationships and
broader product and service offerings than we do. In addition, many of these
competitors have extensive knowledge of our industry. Current and potential
competitors have established, or may further 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.
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.
A
portion of 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 accounting
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, but more recently we have entered
into large transactions with payments from customers due over one or more years.
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 are not able to successfully manage our partner operations in India, our
operations and financial results may be adversely affected.
In
2003, we entered into an agreement with Ness Technologies Inc., 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 testing and certain sustaining engineering
functions. As of September 30, 2008, we use the services of approximately 148
consultants through Ness. In addition, as a result of the reductions in our
workforce that took place in July 2005, October 2006, May 2008, and October
2008, by approximately 10% - 15% in each instance, we continue to have a
significant dependence on Ness. 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 or termination 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
we become subject to intellectual property infringement claims, including
copyright or 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. Additionally, we are seeing copyright
infringement claims being asserted by certain third party software developers.
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 are 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 suit. We have received a letter from one such
patent holding company alleging that our products may infringe one or more of
their patents. We are also the subject of a suit by a person claiming that
certain of our products infringe his copyrights. If any of our products were
found to infringe such patent or copyrights, the patent or copyright 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 costly. A
patent or copyright infringement claim could have a material adverse effect on
our business, operating results and financial condition.
If
we fail to adequately address the difficulties of managing our international
operations, our revenues and operating expenses will be adversely
affected.
For
the fiscal year ended September 30, 2008, international revenues were $54.2
million or approximately 48% of our total revenues. For the fiscal year
ended September 30, 2007, international revenues were $58.8 million or
approximately 47% of our total 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;
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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; and
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Any
of these factors could have a significant impact on our ability to license
products and provide services on a competitive and timely basis and could
adversely affect our operating expenses and net income. Additionally we closed
our only French office in the first fiscal quarter of 2007. The
absence of a business office in France may harm our ability to attract and
retain customers in that country.
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, marketing and professional services
personnel. In particular, in prior years we have had significant turnover of our
executives as well as 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 the 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. In addition, in July
2005, October 2006, May 2008 and October 2008, we reduced the size of our
workforce by approximately 10% - 15% in each instance, which may have a negative
effect on our ability to attract and retain qualified personnel. Further,
particularly in the current economic environment, employees or potential
employees may choose to work for larger, more stable companies.
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 accounting
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.
In
the past 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.
Geopolitical
concerns could make the closing of license transactions with new and existing
customers difficult.
Our
revenues may further decrease in fiscal year 2009 or beyond if we are
unable to enter into new large-scale license transactions with new and existing
customers. The current state of the credit markets and the global economic
decline generally 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 globally will stabilize. 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 maintenance revenues, on which we also
depend.
The
company's common stock price has historically been and may continue be volatile,
which could result in substantial losses for stockholders.
The
market price of shares of the Company’s common stock has been, and is likely to
continue to be, highly volatile and may be significantly affected by factors
such as the following:
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Actual
or anticipated fluctuations in our operating
results;
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Changes
in economic and political conditions in the United States and
abroad;
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Terrorist
attacks, war or the threat of terrorist attacks and
war;
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The
announcement of mergers or acquisitions by the Company or its
competitors;
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Financial
difficulties or poor operating results announced by significant
customers;
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Developments
in ongoing or threatened
litigation;
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Announcements
of technological innovations;
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Failure
to comply with the requirements of Section 404 of the Sarbanes-Oxley
Act;
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New
products or new contracts announced by it or its
competitors;
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Developments
with respect to intellectual property
laws;
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Price
and volume fluctuations in the stock
market;
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Changes
in corporate purchasing of software by companies in the industry verticals
supported by the Company;
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Adoption
of new accounting standards affecting the software industry;
and
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Changes
in financial estimates by securities
analysts.
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In
addition, following periods of volatility in the market price of a particular
company’s securities, securities class action litigation has often been brought
against such companies. If the Company is involved in such litigation, it could
result in substantial costs and a diversion of management’s attention and
resources and could materially harm the Company’s business, operating results
and financial condition.
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, existing business alliance partners IBM, Ness, Electronic Data
Systems, Tata Consultancy Services and HCL Technologies. 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 any of
IBM, Ness, Electronic Data Systems, Tata Consultancy Services or HCL
Technologies 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, Ness, Electronic Data Systems, Tata Consultancy
Services and HCL Technologies and, as a result, these systems integrators
may be more likely to recommend competitors’ products and services. In 2007 and
2008, IBM acquired ILOG, Cognos, DataMirror and Watchfire Corporation.
While we do not believe that ILOG, Cognos, DataMirror or Watchfire Corporation
had been a direct competitor of Chordiant in the past, IBM’s acquisition of
these companies may indicate that IBM will become a competitor of ours in the
future. While the Company currently has 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 takeover 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.
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 recorded an 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 fiscal 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 were
remediated during fiscal year 2007 and management concluded internal controls
over financial reporting were effective for the reporting period.
If
we are not successful in maintaining 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
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 we may experience a net loss on that customer
engagement. 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.
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 negatively impact the development, sales and support of our
products.
In
July 2005, October 2006, May 2008 and October 2008, we reduced the size of our
workforce by approximately 10% - 15% 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, negatively
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, 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 products, features and
functionality in a timely manner, demand for our products may decline. We have
in the past experienced delays in the planned release dates of new products or
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. Given the current economic environment, the risk that one or more
of our suppliers or vendors may go out of business or be unable to meet their
contractual obligations to us is exacerbated. 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, including our ability to
integrate our products with multiple platforms and existing or legacy systems;
and our ability to anticipate and support new standards, especially Internet and
enterprise Java standards.
A
failure in our 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.
In
the fiscal year ended September 30, 2007, we 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. Mergers and
acquisitions of high-technology companies are inherently risky, and the Company
cannot be certain that any acquisition will be successful and will not
materially harm the Company’s business, operating results or financial
condition. Generally, acquisitions involve numerous risks, including the
following: (i) the benefits of the acquisition (such as cost savings and
synergies) not materializing as planned or not materializing within the time
periods or to the extent anticipated; (ii) the Company’s ability to manage
acquired entities’ people and processes that are headquartered in separate
geographical locations from the Company’s headquarters; (iii) the possibility
that the Company will pay more than the value it derives from the acquisition;
(iv) difficulties in integration of the operations, technologies, content and
products of the acquired companies; (v) the assumption of certain known and
unknown liabilities of the acquired companies; (vi) difficulties in retaining
key relationships with customers, partners and suppliers of the acquired
company; (vi) the risk of diverting management’s attention from normal daily
operations of the business; (vii) the Company’s ability to issue new releases of
the acquired company’s products on existing or other platforms; (viii) negative
impact to the Company’s financial condition and results of operations and the
potential write down of impaired goodwill and intangible assets resulting from
combining the acquired company’s financial condition and results of operations
with our financial statements; (ix) risks of entering markets in which the
Company has no or limited direct prior experience; and (x) the potential loss of
key employees of the acquired company. 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 and financial condition.
Changes
in our revenue recognition model could result in short-term declines to
revenue.
Historically,
we have accounted for a high percentage of our license revenues 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 encounter unexpected delays in maintaining the requisite internal controls
over financial reporting and we expect to incur 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
future periods, management must report on, and our independent registered public
accounting firm must attest to, our internal control over financial reporting as
required by Section 404 of SOX, within the time frame required by
Section 404. We may encounter unexpected delays in implementing those
requirements, therefore, we cannot be certain about the timely completion of our
evaluation, testing and remediation actions or the impact that these activities
will have on our operations. We also expect to 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 2013. We
also lease office space in 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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IPO
Laddering
Beginning
in July 2001, the Company and certain of its 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 the Company’s 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 the Company’s registration
statement and prospectus failed to disclose material facts regarding the
compensation to be received by, and the stock allocation practices of, the
Company’s 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 Cases pending
the outcome of plaintiffs’ petition to the Second Circuit for rehearing en banc.
On April 6, 2007, the Second Circuit denied plaintiffs’ rehearing petition, but
clarified that the plaintiffs may seek to certify a more limited class in the
district court. Accordingly, the settlement will not be finally approved.
Plaintiffs filed amended complaints in six “focus cases” on or about August 14,
2007. The Company is not a focus case. 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. The focus case issuers filed motions to dismiss the claims against them
on or about November 9, 2007 and an opposition to plaintiffs' motion for
class certification on December 21, 2007. On March 16, 2008, the court
denied the motions to dismiss in the focus cases. On October 2, 2008, the
plaintiffs withdrew their class certification motion. A deadline for the focus
case defendants to answer the amended complaints has not been set. 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.
Derivative
Class Action
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.
Instead of opposing the motion to dismiss, on November 14, 2007, the plaintiffs
filed an Amended Complaint adding new allegations against five more current and
former officer and directors. The substantive allegations in the Amended
Complaint were similar to those in the previous complaint. On June 30, 2008, the
parties signed a Stipulation of Compromise and Settlement ("the Settlement"),
which was subject to court approval. On July 7, 2008, the Court preliminarily
approved the Settlement. On October 22, 2008, the Court entered a final order
approving the Settlement and entering judgment in accordance with the
Settlement. The Company’s cash contribution toward the Settlement is not
material to the financial statements.
Patent
Claim
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 management’s attention or cause product delays.
If any of the Company’s products were found to infringe such patents, the patent
holder could seek an injunction to enjoin use of the infringing product and we
could be found liable for monetary damages. 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.
Yue
vs. Chordiant Software, Inc.
On
January 2, 2008, the Company and certain of our officers and one other employee
were named in a complaint filed in the United States District Court for the
Northern District of California by Dongxiao Yue under the caption Dongxiao Yue
v. Chordiant Software, Inc. et al. Case No. CV 08-0019 BZ (N.D. Cal.). The
complaint alleges that the Company’s Marketing Director software product
infringed copyrights in certain software referred to as the “PowerRPC software,”
copyrights which had been owned by Netbula LLC and assigned to Mr. Yue, the sole
employee and owner of Netbula. The alleged infringement includes (a)
distributing more copies of the PowerRPC software than had originally been
authorized in a run time license Netbula granted to Chordiant Software, Intl.,
(b) infringement of a software developer kit (“SDK”) by making copies of the SDK
in excess of those that had been licensed by Netbula, (c) making unauthorized
derivative works of the SDK, (d) unauthorized distribution of PowerRPC for
products operating on the Windows Vista platform, (e) unauthorized distribution
of PowerRPC for server based products. Plaintiff also claims that the license
Netbula granted to Chordiant Software, Int’l Ltd. should not be construed to
authorize uses by its parent company, Chordiant Software, Inc. The plaintiff
seeks monetary damages, disgorgement of profits, and injunctive relief according
to proof. On February 5, 2008, the Company and its officers and employees have
filed a motion to dismiss the complaint for failure to state a claim upon which
relief could be granted, and as to lack of personal jurisdiction as to one
employee. On July 23, 2008 the Court issued an order that (1) denied Plaintiff's
motion to disqualify counsel; (2) granted Oliver Wilson's motion to dismiss for
lack of personal jurisdiction, with prejudice, and (3) granted the Company's
motion to dismiss, ruling that Plaintiff's company, Netbula LLC, is the real
party in interest and must appear through counsel. The Court ruled that Netbula
LLC may file an amended complaint within 45 days, and that Plaintiff may also
join as an individual Plaintiff at that time.
On
September 9, 2008, Plaintiff Yue and Plaintiff Netbula LLC filed a First Amended
Complaint asserting four causes of action relating to the Company’s alleged
unauthorized use and distribution of Plaintiffs’ PowerRPC software: claims for
copyright infringement, unfair competition, and “accession and confusion of
property” against the company, and a claim for vicarious copyright infringement
against the company’s Chief Executive Offer and its former Vice President,
General Counsel and Secretary.
On
September 20, 2008, the parties filed a stipulation allowing Plaintiffs to file
a Second Amended Complaint, which contains the two causes of action for
copyright infringement and vicarious copyright infringement, but does not
include the unfair competition and accession and confusion claims. The Second
Amended Complaint seeks monetary damages, disgorgement of profits, and
injunctive relief according to proof. On November 10, 2008, the Company filed an
answer to the Second Amended Complaint denying liability, and the Company's
Chief Executive Officer and its former Vice President, General Counsel and
Secretary filed a motion to dismiss with respect to the vicarious liability
claim asserted against them individually. At a status conference on November 17,
2008, the Court orally ordered that discovery would proceed in stages, with the
first stage focusing on Chordiant's defense that it had an express or implied
license from Netbula, as well as on the number of copies made by Chordiant of
the Netbula software in question. The Court directed that Chordiant's
motion for summary judgment on the license defense would be heard on April 6,
2009, with any discovery on other issues, and any depositions of third parties,
to proceed only if that motion were denied. No trial date has been set. 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.
The
Company, from time to time, 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 sets forth the range of high and low per share sales prices of
our common stock as reported for each period indicated:
|
High
|
Low
|
||||||
|
Year
Ended September 30, 2008
|
|||||||
|
First
Quarter (October 1 - December 31)
|
$
|
16.60
|
$
|
7.75
|
|||
|
Second
Quarter (January 1 - March 31)
|
$
|
9.00
|
$
|
5.69
|
|||
|
Third
Quarter (April 1 - June 30)
|
$
|
6.42
|
$
|
4.55
|
|||
|
Fourth
Quarter (July 1 - September 30)
|
$
|
6.28
|
$
|
4.50
|
|||
|
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
|
|||
As
of November12, 2008, there were approximately 70 holders of record of our common
stock who together held approximately 186,577 shares of our common stock. The
remainder of our outstanding shares are 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. As of September 30, 2008, the Company had no directors or
executive officers who had any such active trading plans. 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.
Issuer
Purchases of Equity Securities
None.
STOCK
PERFORMANCE GRAPH AND CUMULATIVE TOTAL RETURN
The
following graph shows the five-year cumulative total stockholder return of an
investment of $100 in cash on September 30, 2003 for:
|
(i)
|
|
Our
common stock;
|
|
(ii)
|
|
The
Nasdaq Composite 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.
|
9/03
|
9/04
|
9/05
|
9/06
|
9/07
|
9/08
|
||||||||||||
|
Chordiant
Software, Inc.
|
$
|
100.00
|
$
|
96.36
|
$
|
94.37
|
$
|
101.66
|
$
|
183.58
|
$
|
67.95
|
|||||
|
NASDAQ
Composite
|
$
|
100.00
|
$
|
107.74
|
$
|
123.03
|
$
|
131.60
|
$
|
158.88
|
$
|
119.05
|
|||||
|
S&P
Application Software
|
$
|
100.00
|
$
|
103.58
|
$
|
143.93
|
$
|
149.68
|
$
|
171.97
|
$
|
145.05
|
|||||
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
We
derived the selected financial data as of September 30, 2008 and 2007 and for
the years ended September 30, 2008, 2007, and 2006 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, 2006, 2005 and for the year
ended September 30, 2005 and for the nine-months ended September 30, 2004 from
our 2007 Consolidated Financial Statements in the 2007 Annual Report on
Form 10-K. The consolidated balance sheet as of September 30, 2004 has
been (previously) restated to conform to the (previously) 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.
|
Years
Ended September 30
|
Nine
Months
Ended
September
30,
|
||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
(amounts
in thousands, except per share data)
|
|||||||||||||||||||
|
Consolidated
Statement of Operations Data:
|
|||||||||||||||||||
|
Revenues
|
$
|
112,964
|
$
|
124,547
|
$
|
97,536
|
$
|
83,725
|
$
|
61,023
|
|||||||||
|
Net
income (loss)
|
1,065
|
6,028
|
(16,001
|
)
|
(19,865
|
)
|
(1,371
|
)
|
|||||||||||
|
Net
income (loss) per share—basic
|
0.03
|
0.19
|
(0.51
|
)
|
(0.67
|
)
|
(0.05
|
)
|
|||||||||||
|
Net
income (loss) per share—diluted
|
$
|
0.03
|
$
|
0.18
|
$
|
(0.51
|
)
|
$
|
(0.67
|
)
|
$
|
(0.05
|
)
|
||||||
|
Weighted
average shares used in computing net income (loss) per
share—basic
|
31,658
|
32,425
|
31,073
|
29,780
|
27,904
|
||||||||||||||
|
Weighted
average shares used in computing net income (loss) per
share—diluted
|
31,957
|
33,261
|
31,073
|
29,780
|
27,904
|
||||||||||||||
|
As
of September 30,
|
|||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
(unaudited)
|
|||||||||||||||||||
|
(amounts
in thousands)
|
|||||||||||||||||||
|
Consolidated
Balance Sheet Data:
|
|||||||||||||||||||
|
Cash,
cash equivalents, and marketable securities
|
$
|
55,516
|
$
|
90,146
|
$
|
45,278
|
$
|
38,546
|
$
|
59,748
|
|||||||||
|
Working
capital
|
37,887
|
56,447
|
22,323
|
23,733
|
46,296
|
||||||||||||||
|
Total
assets
|
124,700
|
164,815
|
111,503
|
107,250
|
115,340
|
||||||||||||||
|
Current
and long term portion of capital lease obligations
|
—
|
—
|
95
|
309
|
508
|
||||||||||||||
|
Short-term
and long-term deferred revenue
|
46,334
|
67,982
|
29,505
|
26,197
|
20,581
|
||||||||||||||
|
Stockholders’
equity
|
$
|
59,852
|
$
|
73,361
|
$
|
57,225
|
$
|
65,157
|
$
|
75,912
|
|||||||||
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
1A 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.
Executive
Overview
As
an enterprise software vendor, we generate substantially all of our revenues
from insurance, healthcare, telecommunications, financial services and retail
markets. 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.
Our
business has been adversely impacted by the recent worldwide credit market
turmoil, the result of which is that customers are hesitant to make large
commitments and some customers are merging.
The
Company’s operations and performance depend on our customers having adequate
resources to purchase our products and services. The unprecedented turmoil in
the credit markets and the global economic downturn generally will adversely
impact our customers and potential customers. These economic conditions have
continued to deteriorate despite government intervention globally, and may
remain volatile and uncertain for the foreseeable future. Customers may alter
their purchasing activities in response to lack of credit, economic uncertainty
and concern about the stability of markets in general, and these customers may
reduce, delay or terminate purchases of our products and services or other
sales activities that affect purchases of our products and services. If we are
unable to adequately respond to changes in demand resulting from deteriorating
economic conditions, our financial condition and operating results may be
materially and adversely affected.
Several
of the Company’s current and prior customers have recently merged with others,
been forced to raise significant levels of new capital, or received funds and/or
equity infusions from regulators or governmental entities. This list of
companies is extensive and includes Wachovia Corporation, AIG, Halifax Bank of
Scotland, Royal Bank of Scotland, Barclays, and Lloyds. The impact of these
mergers and changes in ownership on Chordiant’s near term business is uncertain.
Customers who have recently reorganized, merged or face new regulations may
delay or terminated their software purchasing decisions, and as an acquired or
merged entity may lose the ability to make such purchasing decisions, resulting
in declines in our bookings, revenues and cash flows.
For
the fiscal year ended September 30, 2008, we recorded revenue of $113.0 million.
We generated $1.1 million of net income and ended the fiscal year with over
$55.5 million in cash, cash equivalents, and marketable securities as compared
to $90.1 million for fiscal year ended September 30, 2007. In addition, we
repurchased $18.6 million of our common stock during the year.
Total
revenue for the fiscal year ended September 30, 2008 decreased 9% to $113.0
million from $124.5 million of the prior year. The decrease in revenue was
primarily from license revenue, decreasing $19.9 million as the Company had
fewer license transactions. Service revenue increased $8.4 million from prior
year. The increase in service revenue was primarily composed of an increase
of $6.3 million associated with support and maintenance revenue, $0.5
million from consulting revenue, $0.8 million in training revenue and
$0.8 million in expense reimbursement revenue.
Software
Industry Consolidation and Possible Increased Competition
The
enterprise software industry continues to undergo consolidation in sectors of
the software industry in which we operate. In 2007 and 2008 IBM acquired ILOG,
Cognos, DataMirror and Watchfire Corporation; Oracle completed its acquisitions
of Hyperion, Moniforce and BEA Systems; Sun Microsystems acquired MySQL and SAP
acquired BusinessObjects, YASU Technologies and Pilot Software. While we do not
believe that ILOG, Cognos, DataMirror, Watchfire Corporation, Hyperion,
Moniforce, BEA Systems, MySQL, BusinessObjects, YASU Technologies, or Pilot
Software have been significant competitors of Chordiant in the past, the
acquisition of these companies by IBM, Oracle, Sun Microsystems and SAP may
indicate that we may face increased competition from larger and more established
entities in the future.
Financial
Trends
Backlog. Our revenues have
primarily 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, 2008
and 2007, we had approximately $70.1 million and $75.4 million in backlog,
respectively, which we define as contractual commitments by our customers
through purchase orders or contracts. This decrease in backlog is partially
reflected in the decrease of deferred revenue recorded on our balance sheet. For
the period ended September 30, 2007 to September 30, 2008 deferred revenue
decreased $21.6 million due to a decrease of $11.0 million in short-term
deferred revenue and a $10.6 million decrease in long-term deferred revenue.
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;
|
|
|
•
|
contractual
commitments received from customers through purchase orders or contracts
that have yet to be delivered;
|
|
|
•
|
deferred
revenue from customer support contracts;
and
|
|
|
•
|
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. Consulting service orders that have expired are excluded from
backlog.
|
Backlog
is not necessarily indicative of revenues to be recognized in a specified future
period. There are many factors that could 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 fiscal 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. A portion of these orders continue
to 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 to a
more traditional revenue model whereby revenues are recorded upon delivery
..
Service Revenues. Service revenues as
a percentage of total revenues were 70%, 57%, and 58% for the years ended
September 30, 2008, 2007, and 2006, respectively. We expect that service
revenues will represent between 55% and 70% 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 fiscal years ended September 30, 2008, 2007, and 2006,
international revenues were $54.2 million, $58.8 million, and $37.5
million or approximately 48%, 47% and 38% 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 year ended September 30, 2006 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 during fiscal year 2007. 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. In future periods, the Company plans to pursue
revenue opportunities in several emerging markets including Eastern Europe,
Russia, China, and India. We believe international revenues will represent a
larger portion of our total revenues as we expand into emerging
markets.
For
the fiscal years ended September 30, 2008, 2007, and 2006, North America
revenues were $58.8 million, $65.7 million, and $60.0 million or approximately
52%, 53%, and 62% of our total revenues, respectively. We believe North America
revenues will continue to represent 40% to 60% of our total revenues in the
future.
Gross Margins. Management focuses on
license and service gross margins in evaluating our financial condition and
operating performance. Gross margins on license revenues were 97%, 97%, and 96%
for the fiscal years ended September 30, 2008, 2007, and 2006, respectively. 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%, 57%, and 46% for the fiscal years ended
September 30, 2008, 2007, and 2006, 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 50% and 60% in the
foreseeable future.
Costs Related to Compliance with the Sarbanes-Oxley
Act of 2002. In addition to audit fees, 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 fiscal years
ended September 30, 2008, 2007, and 2006, these costs were $0.5 million, $1.0
million, and $1.8 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 2009 is uncertain as compared to the costs incurred
for the year ended September 30, 2008.
Costs Related to Stock Option Investigation. For the fiscal
years ended September 30, 2007 and 2006, significant outside professional
services are included in general and administrative expense 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 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, or 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, differed 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 cash payment equal to the price
differential of the Amended Options. These payments were treated as bonus
payments. These cash payments were approximately $0.3 million and were paid out
in January 2008.
Reductions in Workforce. Subsequent to
our fiscal year ended September 30, 2008, the Company initiated a restructuring
plan, the 2008 Restructuring, intended to align its resources and cost structure
with expected future revenues. The 2008 Restructuring plan included reductions
in headcount and third party consultants across all functional areas in both
North America and Europe. The 2008 Restructuring plan included a reduction of
approximately 13% of the Company’s permanent workforce. A significant portion of
the positions eliminated were in North America.
As
a result of the cost-cutting measures, the Company estimates that it will record
pre-tax cash restructuring charges in the first quarter of fiscal year 2009, of
approximately $0.8 to $0.9 million, including $0.7 to $ 0.8 million for
severance costs and approximately $0.1 million for other contract termination
costs. The Company anticipates that all of the aggregate charges will result in
cash expenditures, the majority of which are to be paid in the first quarter of
fiscal year 2009.
On
May 1, 2008, Chordiant implemented a reduction of approximately 10% of its
workforce. The Company reduced its headcount across all functions of the
organization. Chordiant plans to reallocate resources in support of growth
opportunities in emerging markets as well as adding headcount in revenue
generating areas such as sales and alliances. Chordiant incurred approximately
$0.5 million in expenses in the third quarter of fiscal year 2008 in connection
with this reduction of force. As these costs did not meet the criteria of SFAS
146 to qualify as restructuring expenses, the expenses were charged as operating
expenses to the respective functional areas.
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 10% 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 costs for severance and exiting excess facilities.
During the three months ended March 31, 2007, we incurred an additional charge
of $0.1 million for employee severance costs associated with the closure of our
France office. Also during the three months ended March 31, 2007, we negotiated
an early termination of the France office lease associated with its closure,
resulting in a $0.2 million reduction in the excess facility liability. This
reduction was recorded as an offset to restructuring expense in the period. In
quarter ended December 31, 2007, we negotiated a break clause in the lease
allowing for an early termination of the United Kingdom facility which released
us from any future rent liabilities subsequent to January 2008. All termination
payments have now been made.
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 $1.1 million in the fourth quarter ended September 30, 2005
for severance benefits. During the three months ended March 31, 2007, the
Company incurred an additional charge of less than $0.1 million for additional
severance expense for an employee located in France.
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 fiscal 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 Generally Accepted Accounting Principles or GAAP 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:
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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;
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Estimating
valuation allowances and accrued liabilities, specifically the allowance
for doubtful accounts, and assessment of the probability of the outcome of
our current litigation;
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Stock-based
compensation expense;
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Accounting
for income taxes;
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Valuation
of long-lived and intangible assets and
goodwill;
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Restructuring
expenses; and
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Determining
functional currencies for the purposes of consolidating our international
operations.
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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 services or PCS, 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 period to period 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 the American Institute of
Certified Public Accountant’s or AICPA’s 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 PCS
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 PCS 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 that is 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.
For
transactions involving extended payment terms, we deem these fees not to be
fixed or determinable for revenue recognition purposes and revenue is deferred
until the fees become payable and due.
For
arrangements with multiple elements accounted for under SOP 97-2 where we
determine we can account for the elements separately and the fees are not fixed
or determinable due to extended payment terms, revenue is recognized in the
following manner. If the undelivered element is PCS, or other services, an
amount equal to the estimated value of the services to be rendered prior to the
next payment becoming due is allocated to the undelivered services. The residual
of the payment is allocated to the delivered elements of the
arrangement.
For
arrangements with multiple elements accounted for under SOP 81-1 where we
determine we can account for the elements separately and the fees are not fixed
or determinable due to extended payment terms, revenue is recognized in the
following manner. Amounts are first allocated to the undelivered elements
included in the arrangement, as payments become due or are received, the
residual is allocated to the delivered elements.
We
recognize revenue for PCS ratably over the support period which typically 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.
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 $25.5 million with an allowance for doubtful accounts of $0.6 million
as of September 30, 2008. 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. 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. Based upon current economic conditions, the Company has reviewed
accounts receivable and has recorded allowances as deemed
necessary.
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 2008 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, 2008 variables, it is
estimated that a change of 10% in either the volatility, expected life or
interest rate assumption would result in a corresponding 8%, 5% or 1% change in
the estimated value of the option being valued using the Black-Scholes
model. See Note 12 to the Consolidated Financial Statements for detailed
information regarding stock-based compensation expense.
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 net 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.
At
September 30, 2008, we have $75.8 million in gross deferred tax assets (DTAs)
attributable principally to our net operating losses (NOLs). Historically, we
have maintained a 100% valuation allowance on our DTAs because we have
previously been unable to conclude that it is more-likely-than-not that we will
realize the tax benefits of these DTAs. Based on recent operating results and
the reorganization of our intellectual property into the U.S., our current
projections of disaggregated future taxable income have enabled us to conclude
that it is more-likely-than-not that we will have future taxable income
sufficient to realize $10.0 million of tax benefits from our deferred tax
assets, which consist of that portion of our net deferred tax assets
attributable to our net operating losses (NOLs) residing in the United Kingdom.
Accordingly, we have released (eliminated) $10.0 million of the valuation
allowance on our DTAs, of which $9.5 million is recognized as an offsetting
reduction to goodwill (representing pre-acquisition NOLs) and $0.5 million is
recognized as a credit (reduction) to the provision for income taxes. In future
periods, we expect to incur tax expense related to the United Kingdom which will
result in an increase in overall expense; however, to the extent that such tax
expense is offset by the utilization of NOLs, the recognition of this additional
tax expense will be a non-cash item.
The
remaining balance of gross deferred tax assets was generated in the U.S. With
respect to our U.S. generated deferred tax assets, we have recorded a full
valuation allowance as the future realization of the tax benefit is not
considered by management to be more likely than not. Our estimate of future
taxable income considers available positive and negative evidence regarding our
current and future operations, including projections of income in various states
and foreign jurisdictions. We believe our estimate of future taxable income is
reasonable; however, it is inherently uncertain, and if our future operations
generate taxable income greater than projected, further adjustments to reduce
the valuation allowance are possible. Conversely, if we realize unforeseen
material losses in the future, or our ability to generate future taxable income
necessary to realize a portion of the net deferred tax asset is materially
reduced, additions to the valuation allowance could be recorded. At September
30, 2008, the balance of the deferred tax valuation allowance was approximately
$65.9 million.
Effective
October 1, 2007, the Company adopted Financial Accounting Standards Board
Interpretation, No. 48 “Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109” or FIN 48. FIN 48 prescribes a
recognition threshold and measurement guidance for the financial statement
reporting of uncertain tax positions taken or expected to be taken in a
company’s income tax return. The application of FIN 48 is discussed in Note 11
to the Consolidated Financial Statements.
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:
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Significant
underperformance relative to expected historical or projected future
operating results;
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Significant
changes in the manner of our use of the acquired assets or the strategy
for our overall business;
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Significant
negative industry or economic
trends;
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Significant
decline in our stock price for a sustained
period;
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Market
capitalization declines relative to net book value;
and
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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.
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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. While the recent decline in our
stock price and negative economic trends have lowered our market capitalization
at September 30, 2008, our market capitalization is still at the levels
significantly higher than our book value.
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, 2008 and 2007 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, 2008 and 2007 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.
In
the fiscal year ended September 30, 2008, we reduced goodwill by $9.5 million.
The adjustment relates to a tax benefit attributable to our acquisition in the
United Kingdom. The adjustment of goodwill is discussed in Note 11 to the
Consolidated Financial Statements.
Restructuring Expenses. In the past several
years, we have implemented various 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. See Note 6 to the
Consolidated Financial Statements for detailed information regarding
restructuring expenses.
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
Consolidated Balance Sheet for all periods presented.
Historically
the settlement of long term intercompany balances has not been planned or
anticipated. As a result, accumulated foreign currency gains and losses
associated with these intercompany balances have been included in “Accumulated
Other Comprehensive Income (Loss)” on the Consolidated Balance Sheets. While the
Company has no current intent to settle these long term accounts, circumstances
could change at some point in the future. For example, the transfer of cash
balances currently held by international subsidiaries to the parent company in
the U.S. might be considered as a source of funds for potential merger and
acquisition activity or additional share repurchase programs. In the event that
the entities were to plan to settle such long term intercompany balances, any
associated accumulated foreign currency gain or loss would need to be
reclassified to the Consolidated Statement of Operations, resulting in a
realized gain or loss. The amount of the gain or loss would be dependent upon
the exchange rates in effect when settlement was planned or
anticipated.
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, 2008, approximately $39.3 million of our cash and cash equivalents were held
by our subsidiaries outside of the United States.
Recent
Accounting Pronouncements
See
Note 5 to the Consolidated Financial Statements for detailed information
regarding status of new accounting standards that are not yet effective for
us.
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,
|
||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||
|
Consolidated
Statements of Operations Data:
|
||||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||
|
License
|
$
|
34,111
|
30
|
%
|
$
|
54,052
|
43
|
%
|
$
|
40,514
|
42
|
%
|
||||||||||
|
Service
|
78,853
|
70
|
70,495
|
57
|
57,022
|
58
|
||||||||||||||||
|
Total
revenues
|
112,964
|
100
|
124,547
|
100
|
97,536
|
100
|
||||||||||||||||
|
Cost
of revenues:
|
||||||||||||||||||||||
|
License
|
1,059
|
1
|
1,813
|
2
|
1,690
|
2
|
||||||||||||||||
|
Service
|
34,012
|
30
|
30,329
|
24
|
30,566
|
31
|
||||||||||||||||
|
Amortization
of intangible assets
|
1,211
|
1
|
1,211
|
1
|
1,211
|
1
|
||||||||||||||||
|
Total
cost of revenues
|
36,282
|
32
|
33,353
|
27
|
33,467
|
34
|
||||||||||||||||
|
Gross
profit
|
76,682
|
68
|
91,194
|
73
|
64,069
|
66
|
||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||
|
Sales
and marketing
|
34,722
|
31
|
32,597
|
26
|
33,616
|
34
|
||||||||||||||||
|
Research
and development
|
25,598
|
22
|
27,546
|
22
|
25,858
|
27
|
||||||||||||||||
|
General
and administrative
|
17,995
|
16
|
19,898
|
16
|
20,445
|
21
|
||||||||||||||||
|
Restructuring
expense
|
—
|
—
|
6,543
|
6
|
—
|
—
|
||||||||||||||||
|
Total
operating expenses
|
78,315
|
69
|
86,584
|
70
|
79,919
|
82
|
||||||||||||||||
|
Income
(loss) from operations
|
(1,633
|
)
|
(1
|
)
|
4,610
|
3
|
(15,850
|
)
|
(16
|
)
|
||||||||||||
|
Interest
income, net
|
2,383
|
2
|
2,198
|
2
|
1,120
|
1
|
||||||||||||||||
|
Other
income (expense), net
|
417
|
—
|
822
|
1
|
(627
|
)
|
—
|
|||||||||||||||
|
Income
(loss) before income taxes
|
1,167
|
1
|
7,630
|
6
|
(15,357
|
)
|
(15
|
)
|
||||||||||||||
|
Provision
for income taxes
|
102
|
—
|
1,602
|
1
|
644
|
1
|
||||||||||||||||
|
Net
income (loss)
|
$
|
1,065
|
1
|
%
|
$
|
6,028
|
5
|
%
|
$
|
(16,001
|
)
|
(16
|
)%
|
|||||||||
Comparison
of the Year Ended September 30, 2008 to the Year Ended September 30,
2007
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. Licenses sold
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 method is influenced by the progress of work performed
relative to the project length of customer contracts and the dollar value of
such contracts. These orders typically involve consulting services that are
essential to functionality of the respective licenses. The following table sets
forth our license revenue by product emphasis for the years ended September 30,
2008 and 2007 (in thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2008
|
2007
|
Change
|
%
|
||||||||||||||
|
License
Revenue:
|
|||||||||||||||||
|
Enterprise
solutions
|
$
|
19,615
|
$
|
37,648
|
$
|
(18,033
|
)
|
(48
|
)%
|
||||||||
|
Marketing
solutions
|
6,744
|
6,013
|
731
|
12
|
|||||||||||||
|
Decision
management solutions
|
7,752
|
10,391
|
(2,639
|
)
|
(25
|
)
|
|||||||||||
|
Total
license revenue
|
$
|
34,111
|
$
|
54,052
|
$
|
(19,941
|
)
|
(37
|
)%
|
||||||||
Total
license revenue decreased $19.9 million, or 37%, for the year ended September
30, 2008 compared to the same period of the prior year. The decrease in license
revenue is the result of fewer sales transactions and transactions of smaller
magnitude being executed in the current year. In the quarter ended June 30,
2007, we recognized license revenue that was deferred in the previous quarters.
These revenues were deferred as they were related to an undelivered license
element that was subsequently delivered in the June 2007 quarter.
Service Revenue. Service revenue is
primarily composed of consulting implementation and integration, consulting
customization, training, 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 non-essential 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, 2008 and 2007 (in
thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2008
|
2007
|
Change
|
%
|
||||||||||||||
|
Service
Revenue:
|
|||||||||||||||||
|
Enterprise
solutions
|
$
|
54,805
|
$
|
51,584
|
$
|
3,221
|
6
|
%
|
|||||||||
|
Marketing
solutions
|
12,721
|
12,369
|
352
|
3
|
|||||||||||||
|
Decision
management solutions
|
11,327
|
6,542
|
4,785
|
73
|
|||||||||||||
|
Total
service revenue
|
$
|
78,853
|
$
|
70,495
|
$
|
8,358
|
12
|
%
|
|||||||||
Total
service revenue increased $8.4 million or 12 % for the year ended September 30,
2008 compared to the same period of the prior year. The increase in
service revenue is primarily related to increases from $6.3 million of
support and maintenance revenue, $0.5 million from consulting revenue,
$0.8 million from training revenue and $0.8 million from expense
reimbursement revenue. Support and maintenance revenue increased due to an
increase number of customers subscribing to the service. If existing customers
do not renew support and maintenance contracts, service revenues could decline.
The changes in foreign exchange rates may also cause revenues related to prepaid
contracts to be lower than ultimately recognized as revenue.
Cost
of Revenues
License. Cost of license
revenue 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. In addition, not all license products have
associated royalty expense. Capitalized software development costs pertain to a
banking product that was completed and available for general release in August
2005 and third party costs associated with the porting of existing products to
new platforms. The following table sets forth our cost of license revenues for
the years ended September 30, 2008 and 2007 (in thousands, except
percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2008
|
2007
|
Change
|
%
|
||||||||||||||
|
Cost
of license revenue
|
$
|
1,059
|
$
|
1,813
|
$
|
(754
|
)
|
(42
|
)%
|
||||||||
|
Percentage
of total revenue
|
1
|
%
|
2
|
%
|
|||||||||||||
Cost
of license revenues decreased $0.7 million or 42% for the year ended September
30, 2008 as compared to the same period of the prior year. The decrease was
primarily from the reduction of royalty expense resulting from the decrease of
37% in license revenue.
Service. Cost of service
revenues consists primarily of personnel, third party consulting, facility
costs, and travel costs incurred to provide consulting implementation and
integration, consulting customization, training, and PCS. The following
table sets forth our cost of service revenues for the years ended September 30,
2008 and 2007 (in thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2008
|
2007
|
Change
|
%
|
||||||||||||||
|
Cost
of service revenue
|
$
|
34,012
|
$
|
30,329
|
$
|
3,683
|
12
|
%
|
|||||||||
|
Percentage
of total revenue
|
30
|
%
|
24
|
%
|
|||||||||||||
Cost
of service revenue increased by $3.7 million or 12% for the year ended September
30, 2008 as compared to the same period of the prior year. The increase was
primarily from increases of $0.3 million in employee related costs, $3.5
million of consultant expense, $0.2 million of sales events, $0.1 million
in travel expense offset by decreases of $0.1 million in legal services and $0.3
million in support and maintenance expense. The increase in consultant
expense is the result of reduction of average headcount of 25% year over year.
The 12% increase in cost is consistent with the 12% increase in service
revenue.
Amortization of Intangible Assets (included in Cost of Revenues). Amortization of
intangible assets cost consists 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, 2008 and
2007 (in thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2008
|
2007
|
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 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 compensation and
benefits, commissions and bonuses, facilities, travel expenses and promotional
and advertising expenses. The following table sets forth our sales and
marketing expenses for the years ended September 30, 2008 and 2007 (in
thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2008
|
2007
|
Change
|
%
|
||||||||||||||
|
Sales
and marketing costs
|
$
|
34,722
|
$
|
32,597
|
$
|
2,125
|
7
|
%
|
|||||||||
|
Percentage
of total revenue
|
31
|
%
|
26
|
%
|
|||||||||||||
Sales
and marketing expenses increased $2.1 million or 7% for the year ended
September 30, 2008 as compared to the same period of the prior year. The
increase was primary from increases of $1.8 million in third party
consultant and commission expense, $0.2 million in recruiting expense, $0.2
million in facility expense, and $0.2 million in travel expense offset by
decrease of $0.2 million in employee related costs. Employee related costs
decreased primarily from the decrease of $3.5 million of commissions paid offset
by increases of $2.8 million of employee salaries and related costs as we
increased headcount for sales personnel year over year, $0.3 million in bonuses
paid, and $0.2 million of stock-based compensation. The increase in consultant
expense is primarily from hiring of consultants in emerging
markets.
Research and
Development. Research and
development expenses are 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 compensation and
benefits, facilities, the cost of software and development tools, equipment and
consulting costs, including costs for offshore consultants. The following table
sets forth our research and development expenses for the years ended September
30, 2008 and 2007 (in thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2008
|
2007
|
Change
|
%
|
||||||||||||||
|
Research
and development costs
|
$
|
25,598
|
$
|
27,546
|
$
|
(1,948
|
)
|
(7
|
)%
|
||||||||
|
Percentage
of total revenue
|
22
|
%
|
22
|
%
|
|||||||||||||
Research
and development expense decreased $1.9 million or 7% for the year ended
September 30, 2008 as compared to the same period of the prior year. The
decrease was primarily from decreases of $1.4 million in employee related costs,
$0.1 million in
consultant
expense, $0.2 million in facility expense, and $0.3 million in travel expense
offset by an increase of $0.1 million in recruiting expense. Employee related
costs decreased primarily from decreases in employee bonuses paid.
General and Administrative. General and
administrative expenses is composed primarily of costs associated with our
executive and administrative personnel (e.g. the office of the CEO, legal, human
resources and finance personnel). These costs consist primarily of employee
compensation and benefits, bonuses, stock compensation expense, facilities,
professional fees, including audit costs and costs for Sarbanes-Oxley Act of
2002 (SOX) consultants. The following table sets forth our general and
administrative expenses for the years ended September 30, 2008 and 2007 (in
thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2008
|
2007
|
Change
|
%
|
||||||||||||||
|
General
and administrative costs
|
$
|
17,995
|
$
|
19,898
|
$
|
(1,903
|
)
|
(10
|
)%
|
||||||||
|
Percentage
of total revenue
|
16
|
%
|
16
|
%
|
|||||||||||||
General
and administrative expense decreased $1.9 million or 10% for the year ended
September 30, 2008 as compared to the same period of the prior year. The
decrease is primarily from decreases of $1.1 million from professional
services, $0.7 million in employee related costs, $0.3 million in consultant
expense, and $0.4 million in facility expense offset by increases of $0.5
million in other expenses related to U.S. state franchise taxes and bad debt
expense. The decrease in professional services is primarily related to the stock
option investigation that occurred in fiscal year 2007. Employee related costs
decreased primarily from decreases in the level of employee bonuses
earned.
Restructuring Expense. In October 2006,
we initiated a restructuring plan that included an immediate reduction in
positions of slightly more than 10% 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
charge of $6.1 million as calculated using the net present value of the related
costs as required by SFAS 146. During the quarter ended March 31, 2007, the
Company incurred an additional charge of $0.1 million for employee severance
costs associated with the closure of the France office. Also during March 2007,
the Company negotiated an early termination of the France office lease
associated with its closure resulting in a $0.2 million reduction in the
restructure facility liability. This reduction was recorded as an offset to
restructuring expense in the period. In quarter ended December 31, 2007, we
negotiated a break clause in the lease allowing for an early termination of the
United Kingdom facility which released us from any future rent liabilities
subsequent to January 2008. All termination payments have now been
made.
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 $1.1 million in the fourth quarter ended September 30, 2005
for severance benefits. During the three months ended March 31, 2007, the
Company incurred an additional charge of less than $0.1 million for additional
severance expense for an employee located in France.
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 a charge associated with
the long term lease which expires in January 2011. In the March 2007 quarter, 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 restructure
charge was recorded in 2002. This change in estimate resulted in a $0.4 million
charge to restructuring in the quarter ended March 31, 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, 2008 and 2007
(in thousands):
|
Years
Ended September 30,
|
|||||||||
|
2008
|
2007
|
||||||||
|
Stock-based
compensation expense:
|
|||||||||
|
Cost
of revenues
|
$
|
490
|
$
|
313
|
|||||
|
Sales
and marketing
|
922
|
744
|
|||||||
|
Research
and development
|
586
|
546
|
|||||||
|
General
and administrative
|
2,127
|
1,417
|
|||||||
|
Total
stock-based compensation expense
|
$
|
4,125
|
$
|
3,020
|
|||||
For
the year ended September 30, 2008, the aggregate stock-based compensation cost
included in cost of revenues and in operating expenses was $4.1 million which is
a combination of $3.8 million associated with stock options, $0.3 million
associated
with
restricted stock awards or RSAs, and zero associated with restricted stock
awards or RSUs. 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 associated with
stock options and $0.2 million associated with RSAs. Stock option expense
increased from fiscal year 2007 to 2008, in part, due to lower expected
forfeiture rate for 2008.
Interest
Income, Net
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, 2008 and 2007 (in
thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2008
|
2007
|
Change
|
%
|
||||||||||||||
|
Interest
income, net
|
$
|
2,383
|
$
|
2,198
|
$
|
185
|
8
|
%
|
|||||||||
|
Percentage
of total revenue
|
2
|
%
|
2
|
%
|
|||||||||||||
Interest
income, net, increased $0.2 million or 8% for the year ended September 30, 2008
as compared to the same period of the prior year. The increase is primarily from
interest income earned from the United Kingdom where the Company held cash
and cash equivalents in accounts that earned a higher return of interest income
than in the prior year. Average balances were also higher for the first half of
the fiscal year.
Other
Income (Expense), Net
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, 2008 and 2007 (in
thousands, except percentages):
|
Years
Ended September 30,
|
|||||||||||||||||
|
2008
|
2007
|
Change
|
%
|
||||||||||||||
|
Other
income (expense), net
|
$
|
417
|
$
|
822
|
$
|
(405
|
)
|
(49
|
)%
|
||||||||
|
Percentage
of total revenue
|
—
|
%
|
1
|
%
|
|||||||||||||
Other
income decreased $0.4 million or 51% for the year ended September 30, 2008 as
compared to the same period of the prior year primarily due to higher net
transaction losses associated with the re-measurement of our short-term
intercompany balances.
Provision
for Income Taxes
Provision for Income Taxes.
Our provision for income taxes is $0.1 million and $1.6 million for the years
ended September 30, 2008 and 2007, respectively. The $1.5 million decrease in
income taxes is primarily due to the reduction of taxable income, the reversal
of valuation allowance on deferred tax assets of $0.5 million and a decrease of
$0.6 million in unrecoverable withholding tax payments related to sales
transactions that occurred in Turkey and Poland compared to fiscal year 2007.
The remainder of our provision is attributable to taxes on earnings from our
foreign subsidiaries and certain U.S. state income taxes.
At
September 30, 2008, we have $75.8 million in gross DTAs attributable principally
to our NOLs. Historically, we have maintained a 100% valuation allowance on our
DTAs because we have previously been unable to conclude that it is
more-likely-than-not that we will realize the tax benefits of these DTAs. Based
on recent operating results and the reorganization of our intellectual property
into the U.S., our current projections of disaggregated future taxable income
have enabled us to conclude that it is more-likely-than-not that we will have
future taxable income sufficient to realize $10.0 million of tax benefits from
our deferred tax assets, which consist of that portion of our net deferred tax
assets attributable to our NOLs residing in the United Kingdom. Accordingly, we
have released (eliminated) $10.0 million of the valuation allowance on our DTAs,
of which $9.5 million is recognized as an offsetting reduction to goodwill
(representing pre-acquisition NOLs) and $0.5 million is recognized as a credit
(reduction) to the provision for income taxes. In future periods, we expect to
incur tax expense related to the United Kingdom which will result in an increase
in overall expense; however, to the extent that such tax expense is offset by
the utilization of NOLs, the recognition of this additional tax expense will be
a non-cash item.
The
remaining balance of gross deferred tax assets was generated in the U.S. With
respect to our U.S. generated deferred tax assets, we have recorded a full
valuation allowance as the future realization of the tax benefit is not
considered by management to be more likely than not. At September 30, 2008, the
balance of the deferred tax valuation allowance was approximately $65.9
million.
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 a 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 was 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 had 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, 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
service 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 normally use some
form of our consulting services in connection with their project.
Cost
of Revenues
License. Cost of license
revenue 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. In addition, not all license products have
associated royalty expense. Capitalized software development costs pertain to a
banking product that was completed and available for general release in August
2005 and third party costs associated with the porting of existing products to
new platforms. 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 combined with the higher
amortization 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 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 are 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 office of the CEO, legal, human
resources and finance personnel). These costs consist primarily of employee
salaries, bonuses, stock compensation expense, benefits, facilities,
professional fees, including audit costs and costs for Sarbanes-Oxley Act of
2002 (SOX) consultants and the 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. See Note 6 to the
Consolidated Financial Statements for detailed information regarding
restructuring expenses.
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
|
|||||