UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
(Mark
One)
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended September 30, 2009
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 001-34179
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Chordiant
Software, Inc.
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(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 Boulevard, Suite 400
Cupertino,
CA 95014
(Address
of principal executive offices) (Zip Code)
(408)
517-6100
(Registrant’s
telephone number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act:
Title
of each class
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Name
of each exchange on which registered
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Common
Stock $.001 Par Value per Share
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The
NASDAQ Stock Market LLC
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(NASDAQ
Global Market)
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Securities
Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes No x
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes No x
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days: Yes x No
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Website, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-K (§229.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes 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.
Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer x
(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, 2009, the last business day of the registrant’s most recently completed
second fiscal quarter: $68,608,078.
As
of November 1, 2009, there were 30,208,845 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 2010 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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13
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Item
2.
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25
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Item
3.
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25
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Item
4.
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26
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Item
5.
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27
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Item
6.
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29
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Item
7.
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30
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Item
7A.
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54
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Item
8.
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55
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Item
9.
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93
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Item
9A.
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93
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Item
9B.
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95
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Item
10.
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95
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Item
11.
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95
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Item
12.
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95
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Item
13.
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95
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Item
14.
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95
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Item
15.
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96
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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.
Chordiant
Software leads the advancement of Customer Experience Management (CEM) solutions
to help global brands multiply customer lifetime value.
Chordiant
Software, and its Cx Enterprise Foundation, Chordiant Decision Management (CDM)
and Chordiant Marketing Director (CMD) Solutions, arms marketing, customer
service and customer loyalty executives with a suite of predictive and adaptive
decisioning applications to deliver an order of magnitude improvement in
customer experience.
Chordiant
gives global brands a real-time unified view and understanding of their
customer’s behavior and capabilities to optimize customer strategies that match
each customer’s individual situation. In addition, Chordiant reshapes the way
brands engage customers with Next-Best-Action™ capabilities that dynamically
guide conversations across every channel, determining and adapting actions as
the interaction is occurring.
Together,
these CEM capabilities are transformative in nature, enabling companies to
deliver intelligent conversations based upon analysis of past customer behavior,
as well as current responses and mood. Now, today’s fast-paced brands can engage
more effectively with customers, quickly measure how the strategy is working and
change at new levels of speed and economy. The net result: faster acquisition,
improved competitiveness, less churn, and superior customer
service.
Chordiant
maximizes the value of every conversation, consistently across every channel.
With Chordiant, brands no longer have to sacrifice a better customer experience
while navigating tight budgets. Business users can efficiently deliver highly
expressive customer experience strategies using models that predict and react to
individual customer expectations, propensities and behaviors. This behavioral
segmentation is combined with powerful real-time decisioning and centrally
deployed to any channel across the enterprise.
Chordiant
signals the end of pre-scripted, inconsistent customer interactions based upon
static, outdated market segmentation. With Chordiant Next-Best-Action™, every
customer interaction becomes unique, appropriate and consistent. The
conversation with the customer is continually guided, with actions adapting as
the conversation is occurring. Recommendations are determined in
real-time, based upon customer responses, mood and instant analysis of customer
behavior.
Chordiant
helps today’s executives in the insurance, healthcare, telecommunications and
financial services markets respond in new ways to changing buyer behavior,
competitive pressures and market dynamics. Chordiant unlocks brands from the
rigid, IT-heavy approach to deploying, measuring and changing customer
strategies. Using the industry’s most contemporary technology, Chordiant gives
business owners powerful visual command and control capabilities to simulate
different strategies and visualize their impact on customers and business
metrics. Once optimized, customer strategies can be deployed at the touch of a
button and changed on-demand, without IT intervention.
Chordiant
heralds a new era of customer experience management solutions. Over 200 of the
world’s most demanding brands trust Chordiant to help them build stronger and
more profitable customer relationships.
Chordiant
Solutions & Technology
Solution
Overview
Our
solutions are designed for global enterprises seeking to optimize their customer
experiences through effective decision analysis, marketing, selling and
servicing efforts. We have designed our solutions and services 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 solutions 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 run 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.
Historically,
our products have been categorized into three general groups: Cx Enterprise
Foundation solutions, Chordiant Decision Management (CDM) solutions, and the
Chordiant Marketing Director (CMD) Solution. Our solutions are designed to
address a variety of business needs within our targeted vertical markets of
insurance, healthcare, telecommunications, and financial services.
Technology
Overview
Chordiant
technology is based on an 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. A combination of decisioning, adaptive, and predictive
analytics allows organizations to 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 and 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 Oracle
(Sun Microsystems) and IBM.
Cx Enterprise Foundation Solutions
Overview
Cx
Foundation Solutions, including Foundation Server, Café, and Tools Platform,
consist 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.
The
Cx Enterprise Foundation 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.
This
solution includes the following product modules:
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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. It is
designed to meet the high volume transaction and business processes common
in enterprise contact centers. This product is used by customer service
professionals, 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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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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Collections: This
product is designed to deliver automation and operational efficiency to
debt recovery and collections professionals. 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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Chordiant Decision Management (CDM)
Solutions
Consisting
of a flexible set of products and tools for adaptive decisioning, predictive
decisioning, and rules, our Chordiant Decision Management (CDM) solution 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
the following products:
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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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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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Chordiant Adaptive
Analytics—Chordiant Adaptive Analytics solution allows customer
facing solutions to be self-learning and to adapt in real time to ensure a
strong balance between customer experience and company revenue
objectives.
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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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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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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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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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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 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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Chordiant Visual Business
Director: This solution allows users to simulate and test the
potential impact of the even the most complex customer strategies before
putting them into production. Once deployed, performance can be monitored
and controlled at any level of operation in
real-time.
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Chordiant
Marketing Director (CMD) Solution
Marketing Director: This
solution is 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). This solution is used by
marketing professionals across all our target markets to segment and target
prospects and customers delivering to them effective marketing campaigns.
Chordiant Marketing Director (CMD) integrates with our Chordiant Decision
Management (CDM) products to provide an integrated campaign management
system.
Chordiant
Mesh Collaboration
Chordiant
Mesh is a collaborative development community where customers, partners, and
Chordiant staff can work together on solutions to respond to customer
initiatives. By providing deep access into Chordiant’s engineering process and
infrastructure, the Mesh enables solution development as a continuous
conversation among stakeholders. All members of Chordiant’s economic ecosystem
can engage directly on a wide variety of solutions, components, and tools. By
applying principles from open source projects to an enterprise solution
development environment, Chordiant Mesh facilitates far greater collaboration,
agility, speed to market, transparency, and quality than customers are
accustomed to receiving from traditional high-end software
providers.
Key
benefits of Chordiant Mesh are:
·
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A
complete software development environment and set of methodologies for
building applications collaboratively with Chordiant and its
partners.
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An
egalitarian venue for the ideation and design of solutions to real
business problems.
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A
best of breed infrastructure for hosting the development of value-added
components.
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An
open-source inspired system that allows Chordiant to 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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With
the Mesh, Chordiant has committed to the long-term success of its customers and
partners by building a tangible and transparent co-innovation environment that
directly impacts product solutions.
Strategic
Direction
The
Company is focused on delivering a suite of solutions which solves complex
business problems while optimizing the customer experience. In this
“new normal” our customers are focused more than ever on customer retention and
loyalty with a focus on multiplying customer lifetime value. This is achieved by
making every customer conversation multi-channel and cross-channel capable while
using customer strategies to drive consistently intelligent solutions. Our
target market is the Global 1000 in the target industries of insurance,
healthcare, telecommunications, and financial services markets. Chordiant
anticipates that it will increasingly deliver business-focused solutions 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, 2009, Vodafone Group Services Limited and
affiliated companies and Citicorp Credit Services Inc. accounted for 20% and 10%
of our total revenues, respectively. The revenue we derived from Vodafone Group
Services Limited and affiliated companies was related to a $26.1 million
agreement we entered into on December 21, 2007 for perpetual enterprise licenses
and support for certain Decision Management Solutions and Marketing Director
Solutions suites. The revenue we derived from Citicorp Credit Services, Inc. was
from an agreement we entered into on December 8, 2006 for license and services.
For a description of the material terms of the agreements with Vodafone Group
Services Limited and Citicorp Credit Services Inc., see our current reports on
Form 8-K filed with the SEC on December 27, 2007 and December 13, 2006,
respectively, which terms are incorporated herein by this
reference.
Sales
and Marketing
Our
sales strategy is a direct business model selling primarily through a geography
based sales organization that is complemented by selling and support efforts
with 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 Global 1000 in the Financial
Services (Retail Banking and Card Processing), Telecommunications (Wireline,
Wireless and Cable) and Insurance (Healthcare, Property & Casualty and Life
and Annuity) industries. Our target buyer is a line of business executive or IT
executive that has a focus on improving their customer’s
experience. We focus in the business-to-consumer (B to C) segment of
the market with a targeted effort on leading consumer companies that have
millions of customers and offer multiple channels as the means of conducting
business and serving customers.
We
license our solutions through the traditional perpetual software model as well
as a term licensing model that was introduced in 2009. We sell our services
direct as well as staff augmentation to large system integration projects within
our Chordiant customer base.
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, Munich
and Beijing. We have sales and support personnel and consultants in various
additional locations in North America and Europe.
Our
Services
We
offer a comprehensive set of customer services including professional consulting
services and product support and training services. We believe that providing
high quality customer service is critical to achieving rapid product
implementation and customer success.
Professional
Services
We
provide implementation consulting and customer support services to licensed
customers through our worldwide professional services organization. Our
professional services consulting teams often assist customers and systems
integrator partners in the configuration and implementation of our software
solutions.
Our
professional services organization deploys consultants as part of the project
team alongside systems integration partners and members of the customer’s
internal team to provide subject matter expertise, technical knowledge, 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 2009,
we renewed for three years 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. Fees for our training
services are typically charged separately from our software license, maintenance
and consulting fees.
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.
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 e-mail and on-site. Additionally, we
provide unspecified product enhancement releases to 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, Wipro Systems,
Infosys, Cognizant, and Patni. We believe that 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, and Oracle
(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 defining a product strategy
that is continuously aligned with market requirements and turning this strategy
into sales assets through architecture, engineering, testing, quality assurance
and enabling the compatibility of our products with third party hardware and
software platforms.
Our
product development resources are organized into a number of development teams
including:
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Cx
Enterprise Platform, which includes Foundational Server, Tools, and
Decision Management Products;
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Operations,
which includes Mesh, Fulfillment, Performance Labs, and Release
Management;
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Applications,
which includes our vertical and Marketing
Applications;
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Product
Test and Quality.
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Our
product development teams have experience in enterprise and distributed
computing, J2EE and object oriented development, data management, process and
workflow engineering, transaction system interfaces, Internet and Web-Services
technologies. Our research and development expenditures were $19.0 million,
$25.6 million, and $27.5 million for the years ended September 30, 2009, 2008,
and 2007, 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
customers. 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, Fidelity National
Information Systems, Inc., S1 Corporation, Infor (Ephipany) 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.
Recently, IBM, SAP, Oracle and Sun Microsystems have made numerous acquisitions
in the industry and Oracle has entered into an agreement to acquire Sun
Microsystems, which transaction is subject to certain regulatory approvals.
While we do not believe that the companies acquired by IBM, SAP and Oracle have
been significant competitors of Chordiant in the past, these acquisitions may
indicate that we may 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,
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 2007, Chordiant received two 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. In fiscal year 2009 and 2008, we neither filed for
nor received patents.
Environmental
Laws
Compliance
with federal, state and local and foreign laws enacted for the protection of the
environment has to date had no material effect on the Company’s capital
expenditures, earnings, or competitive position.
Employees
As
of September 30, 2009, we employed 222 full time employees. Of that total, 71
were primarily engaged in product development, engineering or systems
engineering, 70 were engaged in sales and marketing, 41 were engaged in
professional services and 40 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 description of our sales by geographic region, we incorporate by reference the
information in Note 13 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 description of our revenues, profit and loss, and
total assets, we incorporate by reference the information in Item 6 and Note 13
to our Consolidated Financial Statements contained in Item 8 of this Annual
Report on Form 10-K.
Backlog
For
a 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 SEC. 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.
We
may experience a shortfall in bookings, revenue, earnings, cash flow or other
financial metrics, 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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Our
ability to close new license
transactions;
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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;
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Lengthening
of our sales cycle;
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Efficiently
utilizing our global services organization, direct sales force and
indirect distribution channels;
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Our
ability to develop and market new
products;
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Timing
of new product introductions and product
enhancements;
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Mix
of products licensed and services
sold;
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Activities
of and acquisitions by our
competitors;
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Product
and price competition; and
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Our
ability to control our 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 bookings,
revenues and operating results to fluctuate significantly. Based upon the
preceding factors, we may experience a shortfall in bookings, revenues and
earnings or otherwise fail to meet public market expectations, which could
materially and adversely affect our business, financial condition, results of
operations and the market price of our common stock.
Our
backlog has declined over the past two years, which will adversely affect
revenues and could result in losses in future periods, and 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 includes 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, deferred revenue from
customer support contracts, and deferred consulting and education orders for
services not yet completed or delivered.
Prior
to the fiscal quarter ended September 30, 2009 when backlog increased, backlog
had declined sequentially over each of the prior six fiscal quarters due to
lower than expected bookings. In the aggregate, backlog declined significantly
over the past fiscal year. The decline in backlog is primarily due to revenue on
previously signed transactions being recognized at a faster pace than new
transactions were being consummated. Each category of backlog has also been
unfavorably impacted by recent foreign exchange rate changes, as significant
portions of the underlying balances are denominated in Euros or Pounds
Sterling.
The
decline in backlog and the associated deferred revenue balances will adversely
affect revenues in future periods, and our ability to forecast future revenues
will be diminished. Because our backlog has declined, the financial results of
future periods will be more dependent upon the signing of new transactions.
Accordingly, the level of future revenues will be less predictable. If average
quarterly aggregate bookings remain at the $13.7 million levels achieved during
the past twelve months, future losses would be incurred unless operating
expenses are reduced.
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 or at all. 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. For the fiscal year
ended September 30, 2009, statements of work for professional services
aggregating approximately $5.8 million were reversed from our backlog balances
as the underlying projects were canceled or the statement of work contractually
expired unutilized.
Geopolitical
concerns could make the closing of license transactions with new and existing
customers difficult.
Our
revenues may further decrease in fiscal year 2010 or beyond if we are unable to
enter into new large value license transactions with new and existing customers.
The current state of the global financial markets and the global economic
decline generally have left many customers reluctant to enter into new large
value license transactions without some expectation 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 value license transactions also directly affects our
ability to create additional consulting service and maintenance revenue
opportunities, on which we also depend.
Recent
worldwide 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 global markets and the global economic downturn generally continues to
adversely impact our customers and potential customers. These market and
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 and
payment activities in response to deterioration in their businesses, lack of
credit, economic uncertainty and concern about the stability of markets in
general, and these customers may reduce, delay or terminate purchases of, and
payment for, our products and services. Recently, a number of our current and
prospective 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
market and economic conditions, our financial condition and operating results
may be materially and adversely affected.
In
periods of worsening economic conditions, our exposure to credit risk and
payment delinquencies on our accounts receivable significantly
increases.
Our
outstanding accounts receivables are generally not secured by any form of
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
have faced and may face liquidity concerns and have delayed and may delay or may
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 frequently monitor 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 86% and
92% of our total revenues for the fiscal years ended September 30, 2009 and
2008, 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 opportunistically 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 and prospective customers, especially those in the financial services
and insurance industries, have faced and may continue to 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 and prospective customers to reduce, delay or terminate their
spending on technology, which in turn would have an adverse impact on our
bookings 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, 2009, Vodafone
Group Services Limited and affiliated companies and Citicorp Credit Services,
Inc. accounted for 20% and 10% of our total revenue, respectively. For the
fiscal year ended September 30, 2008, Citicorp Credit Services, Inc. and
Vodafone Group Services Limited and affiliated companies accounted for 22% and
11%, respectively, of our total revenue. 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,
which may materially affect our operating results. For example, Vodafone Group
Services Limited and affiliated companies, which had purchase commitments
through the quarter ended June 30, 2009, may not purchase additional products or
services with us. 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 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 has been, and may continue to be, reduced, resulting in lower revenues
in the future.
Over
the near term, we have shifted the focus of our sales staff towards Decisioning
Management products and have reduced the marketing focus on Enterprise
Foundation products to reflect market conditions. This change in focus may not
be successful and may result in lower revenues.
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 Enterprise 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 are focusing on those projects that are smaller
and faster to complete. Accordingly, we have shifted our sales force to increase
the marketing of these types of solutions. This plan may not be successful and,
as a result, revenues may not meet our expectations. Further, license and
services fees associated with our Decisioning Management solutions generate
smaller sales and, as a result, may result in lower revenues.
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, the Canadian Dollar, and
the Chinese Yuan. Our international sales comprised 65 % and 48% of our total
sales for the fiscal year ended September 30, 2009 and 2008, respectively. Our
future operating results, as well as our cash and deferred revenue balances,
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, 2009, we had a foreign
currency transaction loss of less than $0.1 million. See Item 7A, Quantitative
and Qualitative Disclosures about Market Risk, for further
discussions.
Given
current economic and market conditions, we may be forced to make additional
reductions to our workforce.
In
July 2005, October 2006, May 2008 and October 2008, we reduced our workforce by
approximately 10% to 15% in each instance. Given the current economic and
market conditions, we may be forced to further reduce our workforce, which could
materially and adversely affect our business, financial condition and results of
operations.
Given
that our stock price is near its historical low, we may be subject to takeover
overtures that will divert the attention of our management and Board, and
require us to incur expenses for outside advisors.
Given
that our stock price is near its historical low, we may be subject to takeover
overtures. Evaluating and addressing these overtures would require the time and
attention of our management and Board, divert them from their focus on our
business, and require us to incur additional expenses on outside legal,
financial and other advisors, all of which could materially and adversely affect
our business, financial condition and results of operations.
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 revenues comprised 71% and 70% of our total revenues for the fiscal
years ended September 30, 2009 and 2008, respectively. Gross margin on service
revenues was 60% and 57% for the fiscal years ended September 30, 2009 and 2008,
respectively. License revenues comprised 29% and 30% of our total revenues for
the fiscal years ended September 30, 2009 and 2008, respectively. Gross margins
on license revenues were 98% and 97% for the fiscal years ended September 30,
2009 and 2008, respectively. As a result, an increase in the percentage of total
revenues represented by services revenues, or an unexpected decrease in license
revenues, could have a detrimental impact on our overall gross margins. 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 have sought and may seek
discounts on our services, or services at no charge, which has and 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 year 2009 as compared to fiscal year 2008, in
fiscal year 2008 as compared to fiscal year 2007, and in fiscal year 2009 we
were not profitable, which may raise vendor viability concerns about us and
thereby make it more difficult to consummate license transactions with new and
existing customers.
Our
revenues decreased materially in fiscal year 2009 as compared to fiscal year
2008 and in fiscal year 2008 as compared to fiscal year 2007. In addition, we
were not profitable in fiscal year 2009 or the fiscal years prior to September
30, 2007. As of September 30, 2009, we had an accumulated deficit of $236.6
million. We may incur losses in the future and cannot be certain that we can
generate sufficient revenues to achieve profitability. Continued losses or
decreased revenues may make 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
profitability and/or viability concerns by our vendors, our revenues could
decline, which could further adversely affect our operating
results.
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 acquire us 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 a provision 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 primary products have a long
sales and implementation cycle, which makes it difficult to predict our
quarterly and annual results and may cause our operating results to vary
significantly from period to period.
The
period between the initial contact with a prospective customer and the sale of
our products is unpredictable and often lengthy, typically 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 a significant commitment
of technical and financial resources that may be provided 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 technology 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 may 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, each of whom we
expect will continue to be a significant source of competition. 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.
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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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Application software
vendors: we compete with providers of stand-alone point solutions
for web-based customer relationship management as well as traditional
client/server-based, call-center service customer and sales-force
automation solution providers, many of whom offer broad suites of
application and other software.
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The
enterprise software industry continues to undergo consolidation in sectors of
the software industry in which we operate. IBM, SAP, Oracle and Sun Microsystems
have made numerous acquisitions in the industry and Oracle has entered into an
agreement to acquire Sun Microsystems, which transaction is subject to certain
regulatory approvals. While we do not believe that the companies acquired by
IBM, SAP and Oracle have been significant competitors of Chordiant in the past,
these acquisitions may indicate that we may 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.
Since
2003, we have contracted with Ness Technologies Inc., Ness USA, Inc. (formerly
Ness Global Services, Inc.) and Ness Technologies India, Ltd. (collectively,
“Ness”) to attract, train, assimilate and retain sufficient highly qualified
personnel to provide staffing for our consulting projects, technical support,
product testing and certain sustaining engineering functions. As of September
30, 2009, we use the services of approximately 127 consultants through Ness. In
addition, as a result of the reductions in our workforce in recent years, 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 pay damages and/or enter into royalty or licensing agreements to be
able to sell our products, if at all. Royalty and licensing agreements, if
required, may not be available on terms acceptable to us or at all. A patent or
copyright infringement claim could have a material adverse effect on our
business, operating results and financial condition.
We
are the subject of a suit by a person and related entity claiming that certain
of our products infringe their copyrights. Such litigation is
costly. If any of our products were found to infringe such
copyrights, we could be required to pay damages. If we were to settle
such claim, it could be costly.
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, 2009, international revenues were $50.5
million or approximately 65% of our total revenues. For the fiscal year ended
September 30, 2008, international revenues were $54.2 million or approximately
48% of our total revenues. We expect that international revenues will continue
to represent a significant portion of our total revenues in future periods. We
have faced, and will continue to face, difficulties in managing international
operations, which include:
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Difficulties
in hiring qualified local
personnel;
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Seasonal
fluctuations in customer orders;
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Longer
accounts receivable collection
cycles;
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Expenses
associated with licensing products and servicing customers in foreign
markets;
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Economic
downturns and political uncertainty in international
economies;
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Income
tax withholding issues in countries in which we do not have a physical
presence, resulting in non-recoverable tax
payments;
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Complex
transfer pricing arrangements between legal
entities;
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Doing
business and licensing our software to customers in countries with weaker
intellectual property protection laws and enforcement capabilities;
and
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Difficulties
in commencing new operations in countries where the Company has not
previously conducted business, including those associated with tax laws,
banking relationships, product registrations, employment laws, government
regulation, product warranty laws and adopting to local customs and
culture;
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Any
of these factors could have a significant impact on our ability to license
products and provide services on a competitive and timely basis and could
adversely affect our operating expenses and net income.
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 engineering organizations, and
several 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 developing and marketing new products. 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.
Further, particularly in the current economic environment, employees or
potential employees may choose to work for larger, more profitable
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 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. If we were to enter into similar
transactions, 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.
The
company's common stock price has historically been and may continue to 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 or
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 the Company 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, with our 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. Over the past several
years, IBM has acquired a number of software companies. While we do not believe
those companies were direct competitors of Chordiant in the past, IBM’s
acquisition of these companies may indicate that IBM will become a more
significant competitor of ours in the future. While the Company currently has a
good relationship with IBM, this relationship and the Company’s strategic
relationship agreement with IBM may be harmed if the Company increasingly finds
itself competing with IBM. Our relationships with systems integrators and their
willingness to recommend our products to their customers could be harmed if the
Company were to be subject to a 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
often rely on systems integrators to implement our products. 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.
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.
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 existing, 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 and may in
the future discover software errors in our products as well as in third-party
products, and as a result have experienced and may in the future experience
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
recent years, we have, from time to time, reduced our workforce. 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 suite 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. 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, which could have a
material adverse effect on our business, operating results and financial
condition.
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 our reputation, and any necessary investigative
work and repairs could cause us to incur significant expenses and delays in
implementation, which could have a material adverse effect on our business,
operating results and financial condition.
If
our products do not keep up with advancing technological requirements or 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. If our products do not keep up with advancing
technological requirements or operate with the hardware and software platforms
used by our customers, our customers may license competing products and our
revenues will decline.
Our
failure to successfully acquire or 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 mergers, acquisitions and technology and
other asset transactions. To implement this strategy, we may be involved in
various related discussions and activity. Such endeavors may involve significant
risks and uncertainties, including that we may not consummate opportunities that
we pursue. These endeavors could distract management from current operations
that may adversely affect the Company’s financial condition and operating
results. Merger and acquisition transactions are motivated by many factors,
including, among others, our desire to grow our business, obtain recurring
support and maintenance revenue streams, acquire skilled personnel, obtain new
technologies and expand and enhance our product offerings or markets. 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: (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, particularly those 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; (vii) the risk of diverting management’s attention from normal daily
operations of the business; (viii) the Company’s ability to issue new releases
of the acquired company’s products on existing or other platforms; (ix) 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; (x) risks of entering markets in which the
Company has no or limited direct prior experience; (xi) incurring significant
legal and accounts costs to investigate and analyze potential merger
opportunities which fail to be completed; and (xii) 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 in
revenue.
Historically,
we have recognized revenue for a high percentage of our license transactions on
the percentage-of-completion method of accounting or 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 might 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 ongoing 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.
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 satisfying those requirements. Accordingly,
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 ongoing expenses and diversion of
management’s time as a result of performing ongoing system and process
evaluations and the 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.
We
may experience additional volatility in our operating results as a result of our
periodic evaluation of our goodwill and deferred tax assets.
We
have recorded significant goodwill and deferred tax asset balances that are
subject to periodic evaluation of either impairment or realizability evaluations
under U.S. Generally Accepted Accounting Principles. Such evaluations are based
on factors including our future profitability and market value. As a result, if
we experience significant declines in those measurements, these assets could be
subject to impairment or write-off, which would result in additional volatility
to our operating results.
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, Amsterdam, Munich,
and Beijing. We believe our existing facilities meet our current needs and that
we will be able to obtain additional commercial space as needed.
IPO
Laddering
Beginning
in July 2001, the Company and certain of its officers and directors
(“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
(“IPO”), violated Section 11 of the Securities Act of 1933, as amended
(“Securities Act”), and Section 10(b) of the Securities Exchange Act of 1934, as
amended (“Exchange Act”), 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 that conducted IPO’s of their common stock in the late
1990’s or in the year 2000 (collectively, the “IPO Lawsuits”).
On
February 25, 2009, liaison counsel for plaintiffs informed the district court
that a settlement of the IPO Lawsuits had been agreed to in principle, subject
to formal approval by the parties and preliminary and final approval by the
court. On April 2, 2009, the parties submitted a tentative settlement agreement
to the court and moved for preliminary approval thereof. On June 11, 2009, the
Court granted preliminary approval of the tentative settlement, ordered that
Notice of the settlement be published and mailed, and set a Final Fairness
Hearing for September 10, 2009. On October 6, 2009, the District Court certified
the settlement class in each IPO Case and granted final approval of the
settlement. On or about October 23, 2009, three shareholders filed a Petition
for Permission To Appeal Class Certification Order, challenging the District
Court’s certification of the settlement classes. Between October 29 and November
2, 2009, a number of shareholders also filed direct appeals, objecting to final
approval of the settlement. Similar petitions and direct appeals may
be filed by other shareholders. If the settlement is affirmed on appeal, the
settlement will
result in the dismissal of all claims against the Company and its officers and
directors with prejudice, and the Company’s pro rata share of the settlement
fund will be fully funded by insurance.
Yue
vs. Chordiant Software, Inc.
On
January 2, 2008, the Company and certain of its 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 (N.D. Cal.). The
complaint alleged that the Company’s Marketing Director (“CMD”) software product
infringed copyrights in certain software referred to as the “PowerRPC software,”
copyrights that had been owned by Netbula LLC and assigned to Mr. Yue, the sole
employee and owner of Netbula. The alleged infringement included (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, and (e) unauthorized
distribution of PowerRPC for server based products. Plaintiffs also alleged 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.
Plaintiffs sought unspecified monetary damages, disgorgement of profits, and
injunctive relief according to proof. On February 5, 2008, the Company and its
officers and employees 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 plaintiffs’ motion to disqualify counsel; (2) granted one
employee’s motion to dismiss for lack of personal jurisdiction, with prejudice,
and (3) granted the Company’s motion to dismiss, ruling that Mr. Yue’s company,
Netbula LLC, is the real party in interest and must appear through counsel. The
Court ruled that Netbula LLC could file an amended complaint within 45 days and
join Mr. Yue as an individual plaintiff at that time.
On
September 9, 2008, plaintiffs Dongxiao Yue and 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 Officer
and its former Vice President, General Counsel and Secretary (the “individual
defendants”).
On
September 20, 2008, the parties filed a stipulation allowing plaintiffs to file
a Second Amended Complaint asserting the two causes of action for copyright
infringement and vicarious copyright infringement, but not including the unfair
competition and accession and confusion claims. The Second Amended Complaint
sought unspecified monetary damages, disgorgement of profits, and injunctive
relief according to proof. On November 10, 2008, the Company answered the
complaint and asserted various affirmative defenses, including that the
plaintiffs’ claims are barred by the existence of an express or implied license
from the plaintiffs. On March 2, 2009, the Company filed a motion for summary
judgment based on this defense. On July 9, 2009, the Court found triable issues
about whether the Company held a license and accordingly denied the Company’s
motion for summary judgment.
On
November 10, 2008, the individual defendants filed a motion to dismiss on
grounds that the plaintiffs failed to state a claim as to them. On March 20,
2009, the Court granted the motion to dismiss with leave for plaintiffs to amend
their complaint. Plaintiffs filed a Third Amended Complaint on April 6, 2009,
and the Company and individual defendants answered on April 23,
2009.
On
May 29, 2009, as stipulated by the parties, the Court allowed plaintiffs to file
a Fourth Amended Complaint to include allegations about the Company’s use in CMD
of a different, additional Netbula product, an implementation of ONC RPC for
Java. Plaintiffs filed the Fourth Amended Complaint on May 29, 2009, and
the Company and the individual defendants answered on June 15,
2009.
Also
in its May 29, 2009 order, the Court allowed discovery on all issues to
proceed, set the close of discovery for October 30, 2009, and set the
deadline for dispositive motions for December 14, 2010.
On
September 24, 2009, the Court issued a trial scheduling order, with jury
selection set for April 6, 2010, trial sessions on April 7-9 and
April 13-16, arguments on April 20, 2010, and jury deliberation on
April 21-23, 2010. The Court also set a final pretrial conference for
March 22, 2010.
On
October 30, 2009, both fact and expert discovery closed, although Plaintiffs and
the Company each have pending motions to compel further discovery, with hearings
set for November 17 and December 15, 2009.
On
November 4, 2009, the parties stipulated to the dismissal, with prejudice, of
the Company’s Chief Executive Officer from the case. On November 9, 2009, the
Court ordered the dismissal of the Company’s Chief Executive Officer, leaving
only one remaining individual defendant, the Company’s former general
counsel.
On
November 9, 2009, Plaintiffs filed a motion for partial summary judgment as to
liability for copyright infringement of Plaintiffs’ implementation of ONC RPC
for Java. Also on November 9, 2009, the Company filed a motion for summary
judgment based on the Company’s rights to copy and distribute software under
Plaintiffs’ licensing agreements. The Company also moved for summary judgment as
to Plaintiffs’ ineligibility for statutory damages or attorney fees. The
remaining individual defendant filed a motion for summary judgment as to
vicarious infringement. All of these pending summary judgment motions are set to
be heard on December 14, 2009.
The
Company cannot predict the outcome or provide an estimate of any possible
losses. The Company will continue to vigorously defend itself against the claims
in these actions.
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, 2009
|
|
|
|
|
|
|
|
First
Quarter (October 1 - December 31)
|
$
|
4.75
|
|
$
|
2.15
|
|
|
Second
Quarter (January 1 - March 31)
|
$
|
3.19
|
|
$
|
2.08
|
|
|
Third
Quarter (April 1 - June 30)
|
$
|
4.24
|
|
$
|
2.93
|
|
|
Fourth
Quarter (July 1 - September 30)
|
$
|
4.17
|
|
$
|
3.51
|
|
|
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
|
|
As
of November 1, 2009, there were approximately 78 holders of record of our common
stock who together held approximately 254,117 shares of our common stock. The
remainder of our outstanding shares is held by brokers and other institutions on
behalf of stockholders. We have never paid or declared any cash dividends and do
not intend to pay dividends for the foreseeable future. We currently expect to
retain working capital for use in the operation and expansion of our business
and therefore do not anticipate paying any cash dividends.
In
response to the Securities and Exchange Commission’s or 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, 2009, 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.
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, 2004 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.
*$100
invested on 9/30/04 in stock or index, including reinvestment of dividends.
Fiscal year ending September 30.
|
9/04
|
|
9/05
|
|
9/06
|
|
9/07
|
|
9/08
|
|
9/09
|
Chordiant
Software, Inc.
|
$
|
100.00
|
|
$
|
97.94
|
|
$
|
105.50
|
|
$
|
190.52
|
|
$
|
70.52
|
|
$
|
53.47
|
NASDAQ
Composite
|
$
|
100.00
|
|
$
|
113.78
|
|
$
|
121.50
|
|
$
|
143.37
|
|
$
|
109.15
|
|
$
|
112.55
|
S&P
Application Software
|
$
|
100.00
|
|
$
|
138.95
|
|
$
|
144.51
|
|
$
|
166.02
|
|
$
|
140.04
|
|
$
|
129.64
|
We
derived the Consolidated Statement of Operations data for the years ended
September 30, 2009, 2008 and 2007 and the Consolidated Balance Sheet data at
September 30, 2009 and 2008 from our audited Consolidated Financial Statements
and Notes thereto appearing in this Form 10-K. We derived the Consolidated
Statement of Operations data for the years ended September 30, 2006 and 2005 and
the Consolidated Balance Sheet data at September 30, 2007, 2006, and 2005 from
Selected Financial Data contained in our 2008 Annual Report on Form 10-K. 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,
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
|
(amounts
in thousands, except per share data)
|
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
77,462
|
|
|
$
|
112,964
|
|
|
$
|
124,547
|
|
|
$
|
97,536
|
|
|
$
|
83,725
|
|
Net
income (loss)
|
|
(10,764
|
)
|
|
|
1,065
|
|
|
|
6,028
|
|
|
|
(16,001
|
)
|
|
|
(19,865
|
)
|
Net
income (loss) per share—basic
|
|
(0.36
|
)
|
|
|
0.03
|
|
|
|
0.19
|
|
|
|
(0.51
|
)
|
|
|
(0.67
|
)
|
Net
income (loss) per share—diluted
|
$
|
(0.36
|
)
|
|
$
|
0.03
|
|
|
$
|
0.18
|
|
|
$
|
(0.51
|
)
|
|
$
|
(0.67
|
)
|
Weighted
average shares used in computing net income (loss) per
share—basic
|
|
30,067
|
|
|
|
31,658
|
|
|
|
32,425
|
|
|
|
31,073
|
|
|
|
29,780
|
|
Weighted
average shares used in computing net income (loss) per
share—diluted
|
|
30,067
|
|
|
|
31,957
|
|
|
|
33,261
|
|
|
|
31,073
|
|
|
|
29,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of September 30,
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
|
(amounts
in thousands)
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents, and marketable securities
|
$
|
49,863
|
|
|
$
|
55,516
|
|
|
$
|
90,146
|
|
|
$
|
45,278
|
|
|
$
|
38,546
|
|
Working
capital
|
|
31,730
|
|
|
|
37,887
|
|
|
|
56,447
|
|
|
|
22,323
|
|
|
|
23,733
|
|
Total
assets
|
|
101,309
|
|
|
|
124,700
|
|
|
|
164,815
|
|
|
|
111,503
|
|
|
|
107,250
|
|
Current
and long term portion of capital lease obligations
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
95
|
|
|
|
309
|
|
Short-term
and long-term deferred revenue
|
|
37,961
|
|
|
|
46,334
|
|
|
|
67,982
|
|
|
|
29,505
|
|
|
|
26,197
|
|
Stockholders’
equity
|
$
|
52,013
|
|
|
$
|
59,852
|
|
|
$
|
73,361
|
|
|
$
|
57,225
|
|
|
$
|
65,157
|
|
Effective
October 1, 2005, the Company adopted a statement issued by Financial Accounting
Standards Board which requires the measurement and recognition of compensation
expense for all shared based payment awards be based on estimated fair value.
This is more fully described in Note 2 to the Consolidated Financial Statements
contained in this Annual report.
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
We
generate substantially all of our revenues from the 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, like other businesses, has been impacted and continues to be impacted
by the global economic recession. Unprecedented market conditions include
illiquid credit markets, volatile equity markets, and dramatic fluctuations in
foreign currency rates and economic recession, all of which have adversely
impacted our business.
Our
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 adversely impacts our
customers and potential customers. These economic conditions have not shown
significant improvement despite government intervention globally, and may remain
volatile and uncertain for the foreseeable future. Customers may alter their
purchasing activities in response to a 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 unfavorable economic
conditions, our financial condition and operating results may be materially and
adversely affected.
Several
of our 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 transactions
on Chordiant’s near term business is uncertain. Customers who have recently
reorganized, merged or face new regulations may delay or terminate their
software purchasing decisions, and an acquired or merged entity may lose the
ability to make such purchasing decisions, resulting in declines in our
bookings, revenues and cash flows. Alternatively, merged customers may expand
the use of our software across the larger entity resulting in opportunities for
us to sell additional software and services.
For
the fiscal year ended September 30, 2009, we recorded revenue of $77.5 million.
We incurred a net loss of $10.8 million and ended the fiscal year with $49.9
million in cash and cash and cash equivalents as compared to $55.5 million for
fiscal year ended September 30, 2008. We used $3.8 million of cash in operating
activities compared to $13.7 million of cash in the prior year.
Total
revenue for the fiscal year ended September 30, 2009 decreased 31% to $77.5
million from $113.0 million in the prior year. The decrease in revenue included
a decline in license revenue, decreasing $11.6 million as the Company had fewer
license transactions. Service revenue decreased $23.9 million from prior year.
The decrease in service revenue was primarily composed of a decrease of $14.5
million from consulting revenue, $6.0 million associated with support and
maintenance revenue, $1.1 million in training revenue and $2.3 million in
expense reimbursement revenue.
Software
Industry Consolidation and Possible Increased Competition
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
of other software companies.
The
enterprise software industry continues to undergo consolidation in sectors of
the software industry in which we operate. IBM, SAP, Oracle and Sun Microsystems
have made numerous acquisitions in the industry and Oracle has entered into an
agreement to acquire Sun Microsystems, which transaction is subject to certain
regulatory approvals. While we do not believe that the companies acquired by
IBM, SAP and Oracle have been significant competitors of Chordiant in the past,
these acquisitions may indicate that we may face increased competition from
larger and more established entities in the future.
Financial
Trends
Backlog. As of September 30,
2009 and 2008, we had approximately $43.5 million and $70.1 million in backlog,
respectively, which we define as contractual commitments made by our customers
through purchase orders or contracts. 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.
|
The
$26.6 million decline in total backlog over the past fiscal year is due to
declines of approximately $15.1 million, $5.4 million and $6.1 million in the
areas of software licenses, customer support contracts and professional services
consulting contracts, respectively. Backlog has declined sequentially for six of
the past seven fiscal quarters. The declines in backlog are due to revenue on
previously signed transactions being recognized at a faster pace than new
transactions are being consummated. Each category of backlog has also been
impacted by recent foreign exchange rate changes, as significant portions of the
underlying balances are denominated in Euros or in Pounds Sterling.
The
decline in backlog and the associated deferred revenue balances will adversely
affect revenues in future periods and our ability to forecast future revenues
will be diminished. Because our backlog has declined, the financial results of
future periods will be more dependent upon the signing of new transactions.
Accordingly, the level of future revenues will be less predictable. If average
quarterly aggregate bookings remain at the $13.7 million levels achieved during
the past twelve months, future losses will be incurred unless operating expenses
are further reduced.
With
respect to the decline in the backlog of professional service consulting
contracts, as some customers recently delayed or canceled projects, statements
of work for professional services either expired unutilized or were canceled.
For the fiscal year ended September 30, 2009 these items aggregated $5.8 million
and were removed from backlog at the date of the expiration or cancellation.
While additional significant cancelations are not contemplated, such events
could cause further declines.
Backlog
at September 31, 2008 included approximately $12.6 million of licenses and
support balances relating to a large telecommunications customer commitment, the
majority of which was recognized during the fiscal year. Accordingly, the
balance of backlog may continue to decline in the near term if bookings are not
sufficient to offset the amounts recognized as revenue.
Backlog
is not necessarily indicative of revenues to be recognized in a specified future
period. There are many factors that would impact Chordiant’s conversion of
backlog as recognizable revenue, such as Chordiant’s progress in completing
projects for its customers, Chordiant’s customers’ meeting anticipated schedules
for customer-dependent deliverables and customers increasing the scope or
duration of a contract causing license revenue to be deferred for a longer
period of time.
A
significant portion of our revenues have been derived from large customer
transactions. For some of these transactions, the associated professional
services provided to the customer can span over a period greater than one year.
If the services delivery period is over a prolonged period of time, it will
cause the associated backlog of services to be recognized as revenue over a
similar 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.
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 71%, 70%, and 57% for the years
ended September 30, 2009, 2008, and 2007, respectively. We expect that service
revenues will represent between 60% and 75% 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, 2009, 2008, and 2007, international revenues
were $50.5 million, $54.2 million, and $58.8 million or approximately 65%, 48%,
and 47% of our total revenues, respectively. In future periods, the Company
plans to pursue revenue opportunities in several emerging markets including
Eastern Europe, Russia, China, and India. We believe that international revenue
may represent a larger portion of our total revenues if our expansion into
emerging markets is successful.
For
the fiscal years ended September 30, 2009, 2008, and 2007, North America
revenues were $27.0 million, $58.8 million, and $65.7 million or approximately
35%, 52%, and 53% of our total revenues, respectively. The decrease in the
fiscal year ended 2009 from 2008 was primarily due to a fewer number of
transactions at lower average prices. We believe North America revenues will
continue to represent a significant portion of our total revenues in the
foreseeable 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 98%,
97%, and 97% for the fiscal years ended September 30, 2009, 2008, and 2007,
respectively. The increase in margin for the fiscal year ended September 30,
2009 is primarily a function of the fixed periodic amortization costs associated
with a capitalized software project. We fully amortized these costs in fiscal
year 2008. We expect license gross margins on current products to range from 96%
to 98% 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 60%, 57%, and 57% for the fiscal years ended
September 30, 2009, 2008, and 2007, respectively. We expect that gross margins
on service revenues 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, 2009, 2008, and 2007, these costs were $0.4
million, $0.5 million, and $1.0 million. While these costs are expected to
continue into the next fiscal year, the decline in amount and timing of the
costs through fiscal year 2010 is uncertain as compared to the costs incurred
for the year ended September 30, 2009.
Reductions in Workforce. In
October 2008, we initiated a restructuring plan intended to align our resources
and cost structure with expected future revenues. The restructuring plan
included reductions in headcount and third party consultants across all
functional areas in both North America and Europe. The restructuring plan
included a reduction of approximately 13% of our permanent workforce. A
significant portion of the positions eliminated were in North
America.
As
a result of the cost-cutting measures, we recorded a pre-tax cash restructuring
charge in the first quarter of fiscal year 2009, of approximately $0.9 million,
including $ 0.8 million for severance costs and $0.1 million for other contract
termination costs. We paid the severance costs and other contract termination
costs in the first quarter of fiscal year 2009.
On
May 1, 2008, we implemented a reduction of approximately 10% of our workforce.
We reduced our headcount across all functions of the organization. We
reallocated resources in support of growth opportunities in emerging markets as
well as adding headcount in revenue generating areas such as sales and
alliances. We 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 one of the standards issued by Financial Accounting Standards Board or FASB
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.
We
recorded a pre-tax cash restructuring expense of $6.1 million as calculated
using the net present value of the related costs. 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 the three months ended
December 31, 2008, the Company reversed the charge as the Company was not
required to pay the severance expense to the employee. All severance benefits
have now been paid.
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 executed a 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. If the sub-lessee of the facility were to default on their payments to the
Company, further adjustments to restructuring expense would be
required.
Income Taxes. During the
fiscal year ended September 30, 2009, we recognized $3.4 million of non-cash
deferred tax expense related to taxable income in the United Kingdom. It is
expected that we will recognize a total of approximately $1.7 million of
non-cash deferred tax expense during fiscal year 2010. We expect the deferred
tax expense to be reduced in future years.
Effective
October 1, 2007, the Company adopted a FASB guidance on tax provisions and
reclassified $0.2 million of gross unrecognized tax benefits to Other
liabilities—non-current in our Consolidated Balance Sheets. As of September 30,
2009, the Company had $1.0 million of gross unrecognized tax benefits. As of
September 30, 2009, the Company cannot make a reasonably reliable estimate of
the period in which these liabilities may be settled with the respective tax
authorities. See Note 11 to the Consolidated Financial Statements for additional
information.
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 and the
recognition of revenue and expenses 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 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 quarter and could result in operating losses. The
accounting rules related to revenue recognition are complex and are affected by
interpretation of the rules and an understanding of industry practices, both of
which are subject to change. Consequently, the revenue recognition accounting
rules require management to make significant estimates based on
judgment.
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 relevant accounting guidance on software
revenue recognition. In multiple element transactions where VSOE is not
established for an undelivered element, we recognize revenue upon the
establishment of VSOE for that element or when the element is
delivered.
At
the time we enter into a transaction, we assess whether any services included
within the arrangement related to significant implementation or customization
essential to the functionality of our products. For contracts for products that
do not involve significant implementation or customization essential to the
product functionality, we recognize license revenues when there is persuasive
evidence of an arrangement, the fee is fixed or determinable, collection of the
fee is probable and delivery has occurred as prescribed by relevant accounting
guidance on software revenue recognition. 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.
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 the guidance on software revenue
recognition are met. Expenses associated with these co-development arrangements
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 the relevant accounting
guidance on revenue recognition 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 the relevant accounting
guidance 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 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 collectability 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 $17.9 million (including
long-term
accounts
receivable of $0.9 million) with an allowance for doubtful accounts of $0.3
million as of September 30, 2009. Our gross accounts receivable balance was
$25.5 million with an allowance for doubtful accounts of $0.6 million as of
September 30, 2008. 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.
Probability of the outcome of our
current litigation. As discussed in Part I, Item 3 of this Form 10-K
under the heading “Legal Proceedings” and in Note 10, “Litigation” in Notes to
Consolidated Financial Statements, the Company is subject to various legal
proceedings and claims that arise in the ordinary course of business. In
accordance with GAAP, we record a liability when it is probable that a loss has
been incurred and the amount is reasonably estimable. There is significant
judgment required in both the probability determination and as to whether an
exposure can be reasonably estimated. In management’s opinion, we do not have a
potential liability related to any current legal proceedings and claims that
would individually or in the aggregate materially adversely affect its financial
condition or operating results. However, the outcomes of legal proceedings and
claims brought against us are subject to significant uncertainty. Should we fail
to prevail in any of these legal matters or should several of these legal
matters be resolved against us in the same reporting period, the operating
results of a particular reporting period could be materially adversely
affected.
Stock-based Compensation Expense.
We estimate the fair value of share-based payment awards on the date of
grant using the Black-Scholes model. The determination of the fair value of
shared-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.
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
the FASB standard on stock compensation. 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 is based on awards ultimately expected to vest, it has been reduced
for estimated forfeitures. The standard on stock compensation 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 the
FASB standard in future periods, the compensation expense that we record under
the FASB standard 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, 2009 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%, 4% or 1% change,
respectively, 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 about stock-based compensation.
Accounting for Income Taxes.
As part of the process of preparing our Consolidated Financial Statements we are
required to estimate our income taxes in accordance with a FASB standard 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 Sheets. We must
then assess the likelihood that our deferred tax assets will be recovered from
future taxable income and to the extent we believe that recovery is not likely,
we must establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the Consolidated Statement of
Operations.
At
September 30, 2009, we had $74.8 million in gross deferred tax assets (DTAs)
attributable principally to our net operating losses (NOLs) and to a lesser
extent temporary differences relating to deferred revenue. Prior to fiscal year
2008, we 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 at the
subsidiary level and the reorganization of our intellectual property, our
current projections of disaggregated future taxable income have enabled us to
conclude that it is more-likely-than-not that as of September 30, 2009 we will
have future taxable income sufficient to realize $5.2 million of tax benefits
from our deferred tax assets, which consist of that portion of our net deferred
tax assets attributable to our NOLs and capital allowances residing in the
United Kingdom. On September 30, 2008, we had
released
(eliminated) the valuation allowance on our DTAs relating to the United Kingdom,
of which $9.5 million was recognized as an offsetting reduction to goodwill
(representing pre-acquisition NOLs). Beginning on October 1, 2009 through future
periods, we expect to continue incurring tax expense related to the United
Kingdom; however, to the extent that such tax expense is offset by the
utilization of NOLs and capital allowances, 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 DTAs, 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, 2009,
the balance of the valuation allowance is approximately $69.6 million.
Effective
October 1, 2007, the Company adopted a FASB guidance on tax provisions that
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 this FASB guidance is
explained 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. Recently, due to the
decline of our stock price, our market capitalization, and the general economic
climate we have assessed our long-lived assets and intangible assets and
determined that no impairment charge was necessary. At September 30, 2009, the
market capitalization of the Company exceeded the book value of the
Company.
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 ended September 30, 2009 and performed Step 1 of the
goodwill impairment analysis required by a FASB standard on “Goodwill and Other
Intangible Assets”, and concluded that goodwill was not impaired as of September
30, 2009 using the methodology described above. Accordingly, Step 2 was not
performed. We will continue to test for impairment on an annual basis and on an
interim basis if an event occurs or circumstances change that would more likely
than not reduce the fair value of our reporting units below their carrying
amount.
Restructuring Expenses. In
the past several years, we have implemented cost-reduction plans as part of our
continued effort to streamline our operations to reduce ongoing operating
expenses. These plans resulted in restructuring expenses related to, among
others, the consolidation of excess facilities. These charges relate to
facilities and portions of facilities we no longer utilize and either seek to
terminate early or sublease. Cost to terminate contracts represents contract
termination costs related to the restructuring plan. 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, potential defaults on
existing subleases, 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 Statement for detailed information regarding
restructuring expense.
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 our net equity under the
caption “Accumulated Other Comprehensive Income.” Under the relevant accounting
guidance, the treatment of these translation gains or losses is dependent upon
our 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
losses are included as part of Accumulated Other Comprehensive Income within our
Consolidated Balance Sheets for all periods presented.
The
magnitude of foreign currency gains or losses is 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, the Canadian Dollar, and the Chinese Yuan. Any future
translation gains or losses could be significantly larger or smaller than those
reported in previous periods. In June 2009, a long term intercompany account
from the U.S. parent to the U.K. subsidiary in the original amount of $22.9
million was settled. The settlement of this long term intercompany account
resulted in a foreign currency translation gain which is classified as a
component of Accumulated Other Comprehensive Income in the September 30, 2009
Consolidated Balance Sheet. At September 30, 2009, approximately $15.7 million
of our cash and cash equivalents were held by our subsidiaries outside of the
United States as compared to $39.3 million at September 30,
2008.
Recent
Accounting Pronouncements
See
Note 3 to the Consolidated Financial Statements for detailed information
regarding status of new accounting standards.
IFRS
International
Financial Reporting Standards (IFRS) is a comprehensive series of accounting
standards published by the International Accounting Standards Board (IASB). In
November 2008, the SEC issued for comment a proposed roadmap outlining several
milestones that, if achieved, could lead to mandatory adoption of IFRS by U.S.
issuers starting in 2014. Implementation of IFRS reporting would be in staged
transition periods based upon the Company’s filing status. Based upon the
current filing status, the Company would begin IFRS filing for the year ended
September 30, 2017. The SEC is expected to make a determination in 2011
regarding the mandatory adoption of IFRS. We are currently assessing the impact
that this potential change would have on our Consolidated Financial Statements,
and we will continue to monitor the development of the potential implementation
of IFRS.
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,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Consolidated
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
22,462
|
|
|
29
|
%
|
|
$
|
34,111
|
|
|
30
|
%
|
|
$
|
54,052
|
|
|
43
|
%
|
|
Service
|
|
|
55,000
|
|
|
71
|
|
|
|
78,853
|
|
|
70
|
|
|
|
70,495
|
|
|
57
|
|
|
Total
revenues
|
|
|
77,462
|
|
|
100
|
|
|
|
112,964
|
|
|
100
|
|
|
|
124,547
|
|
|
100
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
|
400
|
|
|
1
|
|
|
|
1,059
|
|
|
1
|
|
|
|
1,813
|
|
|
2
|
|
|
Service
|
|
|
22,249
|
|
|
29
|
|
|
|
34,012
|
|
|
30
|
|
|
|
30,329
|
|
|
24
|
|
|
Amortization
of intangible assets
|
|
|
1,211
|
|
|
1
|
|
|
|
1,211
|
|
|
1
|
|
|
|
1,211
|
|
|
1
|
|
|
Total
cost of revenues
|
|
|
23,860
|
|
|
31
|
|
|
|
36,282
|
|
|
32
|
|
|
|
33,353
|
|
|
27
|
|
|
Gross
profit
|
|
|
53,602
|
|
|
69
|
|
|
|
76,682
|
|
|
68
|
|
|
|
91,194
|
|
|
73
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
26,786
|
|
|
34
|
|
|
|
34,722
|
|
|
31
|
|
|
|
32,597
|
|
|
26
|
|
|
Research
and development
|
|
|
18,998
|
|
|
25
|
|
|
|
25,598
|
|
|
22
|
|
|
|
27,546
|
|
|
22
|
|
|
General
and administrative
|
|
|
13,293
|
|
|
17
|
|
|
|
17,995
|
|
|
16
|
|
|
|
19,898
|
|
|
16
|
|
|
Restructuring
expense
|
|
|
784
|
|
|
1
|
|
|
|
—
|
|
|
—
|
|
|
|
6,543
|
|
|
6
|
|
|
Total
operating expenses
|
|
|
59,861
|
|
|
77
|
|
|
|
78,315
|
|
|
69
|
|
|
|
86,584
|
|
|
70
|
|
|
Income
(loss) from operations
|
|
|
(6,259
|
)
|
|
(8
|
)
|
|
|
(1,633
|
)
|
|
(1
|
)
|
|
|
4,610
|
|
|
3
|
|
|
Interest
income, net
|
|
|
520
|
|
|
1
|
|
|
|
2,383
|
|
|
2
|
|
|
|
2,198
|
|
|
2
|
|
|
Other
income, net
|
|
|
9
|
|
|
—
|
|
|
|
417
|
|
|
—
|
|
|
|
822
|
|
|
1
|
|
|
Income
(loss) before income taxes
|
|
|
(5,730
|
)
|
|
(7
|
)
|
|
|
1,167
|
|
|
1
|
|
|
|
7,630
|
|
|
6
|
|
|
Provision
for income taxes
|
|
|
5,034
|
|
|
7
|
|
|
|
102
|
|
|
—
|
|
|
|
1,602
|
|
|
1
|
|
|
Net
income (loss)
|
|
$
|
(10,764
|
)
|
|
(14
|
)%
|
|
$
|
1,065
|
|
|
1
|
%
|
|
$
|
6,028
|
|
|
5
|
%
|
|
Comparison
of the Year Ended September 30, 2009 to the Year Ended September 30,
2008
Revenues
License
Revenue
The
increase or decrease of license revenue occurring within our three different
product emphases is dependent on the timing of when a sales transaction is
completed and whether a license transaction was sold with essential consulting
services. License revenue sold with essential consulting services is generally
recognized 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. 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,
2009 and 2008 (in thousands, except percentages):
|
|
Years
Ended September 30,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
|
%
|
|
|
|
License
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise
Foundation solutions
|
$
|
5,996
|
|
|
$
|
19,615
|
|
|
$
|
(13,619
|
)
|
|
|
(69
|
)%
|
|
|
Marketing
Director solutions
|
|
3,904
|
|
|
|
6,744
|
|
|
|
(2,840
|
)
|
|
|
(42
|
)
|
|
|
Decision
Management solutions
|
|
12,562
|
|
|
|
7,752
|
|
|
|
4,810
|
|
|
|
62
|
|
|
|
Total
license revenue
|
$
|
22,462
|
|
|
$
|
34,111
|
|
|
$
|
(11,649
|
)
|
|
|
(34
|
)%
|
|
Total
license revenue decreased $11.6 million, or 34%, for the year ended September
30, 2009 compared to the same period of the prior year. The change in license
revenue is the result of fewer sales transactions and transactions of
smaller
magnitude
being executed in the comparative periods, primarily due to the current economic
climate. Additionally, customer demand for our Enterprise Foundation solutions
has decreased while demand for our Decision Management solutions has increased
due to our near term shift of focus of our sales staff towards Decision
Management solutions rather than Enterprise Foundation solutions. However, our
Decision Management solutions generally generate smaller revenue per transaction
than our Enterprise Foundation solutions. License revenue as percentage of total
revenue was 29% and 30% for the fiscal years ended September 30, 2009 and 2008,
respectively.
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 our 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 year ended September 30, 2009 and 2008 (in
thousands, except percentages):
|
|
Years
Ended September 30,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
|
%
|
|
|
|
Service
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise
Foundation solutions
|
$
|
32,123
|
|
|
$
|
54,805
|
|
|
$
|
(22,682
|
)
|
|
|
(41
|
)%
|
|
|
Marketing
Director solutions
|
|
9,765
|
|
|
|
12,721
|
|
|
|
(2,956
|
)
|
|
|
(23
|
)
|
|
|
Decision
Management solutions
|
|
13,112
|
|
|
|
11,327
|
|
|
|
1,785
|
|
|
|
16
|
|
|
|
Total
service revenue
|
$
|
55,000
|
|
|
$
|
78,853
|
|
|
$
|
(23,853
|
)
|
|
|
(30
|
)%
|
|
Total
service revenue decreased $23.9 million or 30 % for the year ended September 30,
2009 compared to the same period of the prior year. The change in service
revenue was primarily from decreases of $14.5 million from consulting revenue,
$6.0 million associated with support and maintenance revenue, $1.1 million in
training revenue and $2.3 million in expense reimbursement revenue. The decrease
in consulting revenue is directly related to the decrease in license revenues
for comparable periods since the majority of our customers use some form of our
consulting services in connection with their projects. We derived more of our
license revenues from Decision Management solutions rather than Enterprise
Foundation solutions which require less consulting services.
See
the Financial Trend section for further analysis of revenues.
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 year ended September 30, 2009 and 2008 (in thousands,
except percentages):
|
|
Years
Ended September 30,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
|
%
|
|
|
|
Cost
of license revenue
|
$
|
400
|
|
|
$
|
1,059
|
|
|
$
|
(659
|
)
|
|
|
(62
|
)%
|
|
|
Percentage
of total revenue
|
|
1
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
Cost
of license revenues decreased $0.7 million or 62% for the year ended September
30, 2009 as compared to the same period of the prior year. The change was
primarily from amortization of third party technology which became fully
amortized in fiscal year 2008. In addition, we reduced royalty costs associated
with third party technology included in our products.
Service
Cost
of service revenue consists primarily of personnel costs, third-party consulting
costs, facility and travel costs incurred to provide consulting implementation
and integration, consulting customization, training, and PCS support
services.
The
following table sets forth our cost of service revenue for the year ended
September 30, 2009 and 2008 (in thousands, except percentages):
|
|
Years
Ended September 30,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
|
%
|
|
|
|
Cost
of service revenue
|
$
|
22,249
|
|
|
$
|
34,012
|
|
|
$
|
(11,763
|
)
|
|
|
(35
|
)%
|
|
|
Percentage
of total revenue
|
|
29
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
Cost
of service revenue decreased by $11.8 million or 35% for the year ended
September 30, 2009 as compared to the same period of the prior year. The change
was primarily from decreases of $2.3 million in employee related costs, $0.1
million in recruiting expense, $6.2 million of consultant expense, $0.5 million
in facility expense, and $2.7 million in travel expense. The 35% decrease in
service cost is consistent with the 30% decrease in service revenue. The
decrease in employee related costs is primarily from an 8% reduction in average
headcount and reduction in employee bonuses earned. See Note 6 to the
Consolidated Financial Statement for more details regarding the reduction in
headcount. We also utilized fewer third party consultants because of the
decrease in service revenue.
Gross
Margins
See
the Financial Trend section for our analysis of gross margins.
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 year ended September 30, 2009 and 2008
(in thousands, except percentages):
|
|
Years
Ended September 30,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
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 $ $0.3 million in the first quarter of fiscal year 2010
at which time the balances will be fully amortized.
Operating
Expenses
Sales and
Marketing
Sales
and marketing expense 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, benefits, facilities, travel expenses and
promotional and advertising expenses. The following table sets forth our sales
and marketing expenses for the year ended September 30, 2009 and 2008 (in
thousands, except percentages):
|
|
Years
Ended September 30,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
|
%
|
|
|
|
Sales
and marketing costs
|
$
|
26,786
|
|
|
$
|
34,722
|
|
|
$
|
(7,936
|
)
|
|
|
(23
|
)%
|
|
|
Percentage
of total revenue
|
|
34
|
%
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
Sales
and marketing expenses decreased $7.9 million or 23% for the year ended
September 30, 2009 as compared to the same period of the prior year. The change
was primary from decreases of $4.9 million in employee related costs, $0.4
million in recruiting expense, $0.2 million in consultant expense, $0.9 million
in sales and marketing programs, $0.4 million in facility expense, and $1.1
million in travel expense. The decrease in employee related costs is primarily
from a 9% reduction in average headcount and reductions in employee commissions
and bonuses earned. In addition we canceled or reduced the scope of several
sales events due to the current economic climate.
Research and
Development
Research
and development expense 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 compensation,
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 year ended September
30, 2009 and 2008 (in thousands, except percentages):
|
|
Years
Ended September 30,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
|
%
|
|
|
|
Research
and development costs
|
$
|
18,998
|
|
|
$
|
25,598
|
|
|
$
|
(6,600
|
)
|
|
|
(26
|
)%
|
|
|
Percentage
of total revenue
|
|
25
|
%
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
Research
and development expense decreased $6.6 million or 26% for the year ended
September 30, 2008 as compared to the same period of the prior year. The change
was primarily from decreases of $3.6 million in employee related costs, $0.1
million in recruiting expense, $2.0 million in consultant expense, $0.5 million
in facility expense, and $0.4 million in travel expense. The decrease in
employee related costs is primarily from a 24% reduction in average
headcount.
General and
Administrative
General
and administrative expense 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, bonuses, stock compensation expense, benefits, facilities,
consulting, legal and audit costs, including costs for Sarbanes-Oxley Act of
2002 (SOX) compliance. The following table sets forth our general and
administrative expenses for the year ended September 30, 2009 and 2008 (in
thousands, except percentages):
|
|
Years
Ended September 30,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
|
%
|
|
|
|
General
and administrative costs
|
$
|
13,293
|
|
|
$
|
17,995
|
|
|
$
|
(4,702
|
)
|
|
|
(26
|
)%
|
|
|
Percentage
of total revenue
|
|
17
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
General
and administrative expense decreased $4.7 million or 26% for the year ended
September 30, 2009 as compared to the same period of the prior year. The change
is primarily from decreases of $2.8 million in employee related costs, $0.2
million in recruiting expense, $0.3 million in consultant expense, $0.3 million
in travel expense, $1.0 million in professional services, $0.7 million in bad
debt expense offset by $0.6 million in higher facility expense. The decrease in
employee related costs is primarily from a 26% reduction in average headcount.
The decrease in professional services is primarily from decreases in accounting
services, tax services, and legal services. The increase in facility expense is
primarily from the renewal of our Cupertino headquarters lease.
Restructuring
Expense
In
October 2008, the Company initiated a restructuring plan, intended to align its
resources and cost structure with expected future revenues. The restructuring
plan includes reductions in headcount and third party consultants across all
functional areas in both North America and Europe. The restructuring plan
includes 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 recorded a pre-tax cash
restructuring charge in the first quarter of fiscal year 2009, of approximately
$0.9 million, including $ 0.8 million for severance costs and $0.1 million for
other contract termination costs. We paid the severance costs and other contract
termination costs in the first quart of fiscal year 2009.
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 the three months
ended December 31, 2008, the Company reversed the charge as the Company was not
required to pay the severance expense to the employee. All severance benefits
have now been paid.
Stock-Based Compensation
(Included in Individual Operating Expense and Cost of Revenue
Categories)
The
following table sets forth our stock-based compensation expense and functional
breakdown for the year ended September 30, 2009 and 2008 (in
thousands):
|
|
Years
Ended September 30,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Stock-based
compensation expense:
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
$
|
574
|
|
|
$
|
490
|
|
|
|
Sales
and marketing
|
|
889
|
|
|
|
922
|
|
|
|
Research
and development
|
|
418
|
|
|
|
586
|
|
|
|
General
and administrative
|
|
1,787
|
|
|
|
2,127
|
|
|
|
Total
stock-based compensation expense
|
$
|
3,668
|
|
|
$
|
4,125
|
|
|
For
the year ended September 30, 2009, the aggregate stock-based compensation cost
included in cost of revenues and in operating expenses was $3.7 million which is
a combination of $2.9 million associated with stock options, $0.4 million
associated with restricted stock awards or RSAs, and $0.4 million associated
with restricted stock units or RSUs.
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 RSAs, and zero associated with RSUs. On May 1, 2008, Chordiant
implemented a reduction of approximately 10% of its workforce. As part of the
reduction in workforce, an executive left the Company which resulted in the
modification of his stock options as the right to exercise the stock options was
extended by the Board of Directors. The net charge to stock compensation expense
for the modification was less than $0.1 million.
Stock
compensation decreased in fiscal year 2009 compared to fiscal year 2008
primarily due to new option grants with lower fair value. The
weighted average estimated fair value of stock options granted for fiscal year
2009 was $1.25 as compared to $4.12 for fiscal year 2008.
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 imputed under a FASB standard on restructuring accruals. The
following table sets forth our interest income, net for the year ended September
30, 2009 and 2008 (in thousands, except percentages):
|
|
Years
Ended September 30,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
|
%
|
|
|
|
Interest
income, net
|
$
|
520
|
|
|
$
|
2,383
|
|
|
$
|
(1,863
|
)
|
|
|
(78
|
)%
|
|
|
Percentage
of total revenue
|
|
1
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
Interest
income, net, decreased $1.9 million or 78% for the year ended September 30, 2009
as compared to the same period of the prior year. The change is primarily from
the decrease of cash and cash equivalents. We had higher average balances in
fiscal year 2008 than in fiscal year 2009. Additionally, we earned less interest
income due to lower average interest rates.
Other
Income, 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 currency denominated subsidiaries. The
following table sets forth our other income, net for the year ended September
30, 2009 and 2008 (in thousands, except percentages):
|
|
Years
Ended September 30,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
|
%
|
|
|
|
Other
income, net
|
$
|
9
|
|
|
$
|
417
|
|
|
$
|
(408
|
)
|
|
|
(98
|
)%
|
|
|
Percentage
of total revenue
|
|
—
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
Other
income, net decreased $0.4 million or 98% for the year ended September 30, 2009
as compared to the same period of the prior year. The change is primarily due
the re-measurement of our short-term intercompany balances and the changes in
foreign exchange rates.
Provision
for Income Taxes
These
provisions for income taxes are primarily attributable to taxes on earnings from
our foreign subsidiaries, certain foreign withholding taxes, and non-cash
deferred tax expense on earnings of our UK subsidiaries. The following table
sets forth our provision for income taxes for the years ended September 30, 2009
and 2008 (in thousands, except percentages):
|
|
Years
Ended September 30,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
Change
|
|
|
|
%
|
|
|
|
Provision
for income taxes
|
$
|
5,034
|
|
|
$
|
102
|
|
|
$
|
4,932
|
|
|
|
4,835
|
%
|
|
|
Percentage
of total revenue
|
|
7
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
Our
provision for income taxes was $5.0 million and $0.1 million for the years ended
September 30, 2009 and 2008, respectively. The $4.9 million increase in income
taxes is primarily due to an increase in the taxable income of our UK
subsidiaries which led to a non-cash tax expense of approximately $3.4 million,
representing the utilization of available NOL carryforwards (as discussed
further below), and an increase of $0.8 million in unrecoverable withholding tax
payments related to sales transactions that occurred in Egypt, India, Poland,
Portugal and Turkey compared to the year ended September 30, 2008. The remainder
of our provision is primarily attributable to taxes on earnings from our foreign
subsidiaries.
At
September 30, 2009, we had $74.8 million in gross DTAs attributable principally
to our NOLs and to a lesser extent temporary differences relating to deferred
revenue. Prior to fiscal year 2008, we 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 at the subsidiary level and the reorganization of
our intellectual property, our current projections of disaggregated future
taxable income have enabled us to conclude that it is more-likely-than-not that
as of September 30, 2009 we will have future taxable income sufficient to
realize $5.2 million of tax benefits from our deferred tax assets, which consist
of that portion of our net deferred tax assets attributable to our NOLs and
capital allowances residing in the United Kingdom. On September 30, 2008, we had
released (eliminated) the valuation allowance on our DTAs relating to the United
Kingdom, of which $9.5 million was recognized as an offsetting reduction to
goodwill (representing pre-acquisition NOLs). Beginning on October 1, 2009
through future periods, we expect to continue incurring tax expense related to
the United Kingdom; however, to the extent that such tax expense is offset by
the utilization of NOLs and capital allowances, 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 DTAs, 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, 2009,
the balance of the deferred tax valuation allowance is approximately $69.6
million.
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 our 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
Foundation solutions
|
$
|
19,615
|
|
|
$
|
37,648
|
|
|
$
|
(18,033
|
)
|
|
|
(48
|
)%
|
|
|
Marketing
Director 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 our 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
Foundation solutions
|
$
|
54,805
|
|
|
$
|
51,584
|
|
|
$
|
3,221
|
|
|
|
6
|
%
|
|
|
Marketing
Director 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 in the 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.
See
the Financial Trend section for further analysis of revenues.
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 service cost of revenues is consistent with the 12% increase in service
revenue.
Gross
Margins
See
the Financial Trend section for our analysis of gross margins.
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 expense 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. 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 a